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The Bretton Woods System

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  1. The Bretton Woods System By: Denise Davies

  2. History • Named for the Bretton Woods Monetary Conference which took place in New Hampshire, during July 1-22, 1944. • 44 allied nations and one neutral • US Treasury Harry Dexter White and Britain’s Treasury John Maynard Keynes collaborated for 2 1/2 years to formulate a plan for post-war recovery

  3. Events leading up to the conference • Restrictive market practices which caused the devaluation, deflation and depression that defined the economy of the 1930s. • World War II • The gold standard

  4. The Gold Standard • A certain amount of currency is easily convertible into its equivalent of gold • Towards the end of the war, many nations, such as Britain, did not want to return to the pre-war gold standard, and sought for a more stable standard

  5. Goals of the Conference • Intended to govern currency regulations and establish legal obligations (through the IMF) • Set a standard for exchange rates • Establish international monetary cooperation • Money pool from which member nations can borrow funds

  6. Outcome:formally established December 27, 1945 • 1) “Adjustable peg” currency • 2) Quotas embedded in the IMF which require member nations to pay a certain amount of money (to the Fund) • 3) Members were forbidden to engage in discriminatory currency practices to prevent them from manipulating their price levels and exchange rates • 4) The creation of the IMF and World Bank (InternationalBank for Reconstruction and Development) • 5) The dollar standard

  7. Problems • Post-war monetary relations were unstable • The member nations underestimated the strength of their funds... after two years of lending, the IMF was drained of its money

  8. Results: Dollar Hegemony • This ultimately led to the U.S., the most powerful nation in the world, taking responsibility as global monetary manager • 1) The US maintained an open market for imports and trade • 2) Granted long-term loans and grants to other nations via the Marshall Plan and other aid programs • 3) Established a liberal lending policy for short-term funds in times of crisis • Soon, the gold exchange standard becomes the dollar exchange standard

  9. The Implied Bargain US's allies acquiesce to this hegemonic system because it benefits their own economies The U.S. becomes a global hegemon due to strength of the dollar U.S. is able to act unilaterally to secure its own interests U.S. allows allies’ use of the system for their own benefit

  10. The End of the Bretton Woods System • Due to the costs of the Vietnam War and nations trading $ for gold, On August 15, 1971, President Nixon announced three changes in the U.S.’s economic policy…. • (1) He imposed a 90-day wage-price freeze • (2) He imposed a temporary tariff on imports. • (3) The end of the Bretton Woods System

  11. Results…. • The link between gold and the dollar is severed • Economies allow their currencies to float freely against the dollar • Flexible exchange rates allow for countries to adjust to increased prices, as was seen in the oil price shocks of the 1970s • The formation of the European Monetary System, to create fixed exchange rates between participating European nations • Members of European Economic Community (now the EU) linked their currencies together

  12. Bretton Woods II &Today’s World • On September 24-25, 2009, President Obama met with the G20 nations where a realignment of currency exchange rates was proposed • The World Bank and IMF are still active, although they have been severely criticized for some of their policies

  13. Sources • http://www.time.com/time/business/article/0,8599,1852254,00.html • http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html • http://www.imf.org • http://www.globalpolicy.org/component/content/article/209/42675.html