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Please note that you cannot buy products through Clipsal Powerhouses. Share this link From: 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. 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. 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. 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. 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. 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 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.

The IMF sought to provide for occasional discontinuous exchange-rate adjustments changing a member's par value by international agreement. 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.

It regularly exchanged personnel with the U. Truman named White as its first U. 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. 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 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 was to be a specialized agency of the United Nations, charged with making loans for economic development purposes. 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. It was necessary to reverse this flow. Even though all nations wanted to buy U.

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. Recall that speculative investment was discouraged by the Bretton Woods agreement. Importing from other nations was not appealing in the s, because U. So, multinational corporations and global aid that originated from the U.

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. 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 the IMF and the IBRD themselves were admitting that they could not deal with the international monetary system's economic problems. 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. Secretary of State George Marshall stated:. The breakdown of the business structure of Europe during the war was complete. From until , the U. Dollars flowed out through various U. Greek and Turkish regimes, which were struggling to suppress communist revolution, aid to various pro-U.

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.

In , 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. In the past, the reasons why the Soviet Union chose not to subscribe to the articles by December 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. Facing the Soviet Union, whose power had also strengthened and whose territorial influence had expanded, the U. The rise of the postwar U. Despite the economic effort imposed by such a policy, being at the center of the international market gave the U. A trade surplus made it easier to keep armies abroad and to invest outside the U.

The dollar continued to function as a compass to guide the health of the world economy, and exporting to the U. 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.

As world trade increased rapidly through the s, the size of the gold base increased by only a few percentage points. In , the U. More drastic measures were proposed, but not acted upon. However, with a mounting recession that began in , this response alone was not sustainable. 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. 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 Robert Triffin , Belgian American economist, noticed that holding dollars was more valuable than gold because constant U.

What would later come to be known as Triffin's Dilemma was predicted when Triffin noted that if the U. But incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.

The first effort was the creation of the London Gold Pool on 1 November 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.

The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. In , there was an attack on the pound and a run on gold in the sterling area , and on 18 November , the British government was forced to devalue the pound.

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.

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: While West Germany agreed not to purchase gold from the U. In January Johnson imposed a series of measures designed to end gold outflow, and to increase U. This was unsuccessful, however, as in mid-March 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.

This was followed by a full closure of the London gold market, also at the request of the U. All attempts to maintain the peg collapsed in November , 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.

In the s and s, 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 and of the Japanese yen in Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence.

Another aspect of the internationalization of banking has been the emergence of international banking consortia. Since various banks had formed international syndicates, and by 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. A second structural change that undermined monetary management was the decline of U.

By the mids, the E. With total reserves exceeding those of the U. The shift toward a more pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U. As in effect the world's central banker, the U. In an increasingly interdependent world, U. In addition, as long as other countries were willing to hold dollars, the U. The Soviet military threat had been an important force in cementing the U. 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.

Reinforcing the relative decline in U. The Vietnam War and the refusal of the administration of U. 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. In the late s, 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.

In contrast, upon the creation of Bretton Woods, with the U. Throughout the s Washington sustained a balance of payments deficit to finance loans, aid, and troops for allied regimes. But during the s the costs of doing so became less tolerable. By the U. Adjustment to these changed realities was impeded by the U.

Gold outflows from the U. Special drawing rights SDRs were set as equal to one U. 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. 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.

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.

This, in the view of neoclassical economists , represented the point where holders of the dollar had lost faith in the ability of the U. In more and more dollars were being printed in Washington, then being pumped overseas, to pay for government expenditure on the military and social programs. 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. The August shock was followed by efforts under U.

Throughout the fall autumn of , a series of multilateral and bilateral negotiations between the Group of Ten countries took place, seeking to redesign the exchange rate regime. 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. The inflow of dollars into foreign banks continued the monetization process of the dollar overseas, defeating the aims of the Smithsonian Agreement. 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 By the early s, all industrialised nations were using floating currencies. The periphery is committed to export-led growth based on the maintenance of an undervalued exchange rate. In the s, 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.

In the wake of the Global financial crisis of , some policymakers [ who? On the other side, this crisis has revived the debate about Bretton Woods II.

On 24—25 September U. 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 , where deficit nations may devalue their currencies and surplus nations may revalue theirs upward.

In March , 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. Over the course of the crisis, the IMF progressively relaxed its stance on "free-market" principles such as its guidance against using capital controls.

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