What Was the Desire behind the Bretton Woods Agreement

On December 17 and 18, 1971, the Meeting of the Group of Ten at the Smithsonian Institution in Washington created the Smithsonian Agreement, which devalued the dollar to $38 an ounce with trading bands of 2.25% and sought to balance the global financial system with SDRs alone. It was criticized at the time and was deliberately a “temporary” agreement. He failed to impose discipline on the U.S. government, and since there was no other credibility mechanism, the pressure against the gold dollar continued. In early 1945, Bernard Baruch described the spirit of Bretton Woods as follows: “If we can stop the subsidization of labor and sweaty competition in export markets,” as well as prevent the reconstruction of war machines, “. Oh boy, oh boy, what long-term prosperity we will have. [20] The United States could therefore use its position of influence to reopen and control the [rules of] the global economy to ensure unfettered access to the markets and materials of all nations. With the establishment of a system of rules, institutions and procedures to regulate the international monetary system, Bretton Woods planners created the International Bank for Reconstruction and Development (IBRD) (now one of the five institutions of the World Bank Group) and the International Monetary Fund (IMF). These organizations began their work in 1946 after a sufficient number of countries ratified the agreement. The agreement did not contain any provision relating to the creation of international reservations. He assumed that a new production of gold would suffice.

In the case of structural imbalances, he expected national solutions, e.B. an adjustment in the value of the currency or an improvement in a country`s competitive position by other means. However, the IMF had few resources to promote such domestic solutions. Far from being an era of international cooperation and global order, the bretton Woods years revealed the difficulties inherent in creating and maintaining an international order that pursued both free and unhindered trade and allowed nations to pursue autonomous political goals. The discipline of a gold standard and fixed exchange rates has proven too important for fast-growing economies with different levels of competition. With the demonetization of gold and the transition to variable currencies, the Bretton Woods era should be seen as a period of transition from a more disciplinary to a much more flexible international monetary order. Free trade was based on the free convertibility of currencies. Negotiators at the Bretton Woods Conference, fresh out of what they perceived as catastrophic in the 1930s, with variable interest rates, concluded that sharp fluctuations in monetary policy could stop the free flow of trade. The Bretton Woods rules, set out 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 also aimed to promote an open system by requiring members to convert their respective currencies into other currencies and to trade freely.

The agreement could not promote discipline from the Federal Reserve or the U.S. government. The Federal Reserve was concerned about an increase in the domestic unemployment rate due to the depreciation of the dollar. In an attempt to undermine the efforts of the Smithsonian agreement, the Federal Reserve lowered interest rates in pursuit of a predetermined national goal of full national employment. With the Smithsonian agreement, member countries expected dollars to return to the United States, but the reduced interest rates in the United States meant that dollars continued to flow from the United States to foreign central banks. The influx of dollars into foreign banks continued the process of monetizing the dollar abroad and thwarted the goals of the Smithsonian agreement. As a result, the price of the dollar on the free gold market continued to exert pressure on its official rate; Shortly after the announcement of a 10% devaluation in February 1973, Japan and the EEC countries decided to let their currencies fluctuate. This turned out to be the beginning of the collapse of the Bretton Woods system. The end of Bretton Woods was officially ratified by the Jamaica Accords in 1976. .

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