Bretton woods system summary
The Bretton Woods system definition is the result of the Bretton Woods conference system. This system appears to control the value of money between various countries.
In the Bretton Woods system, every country has a monetary policy to keep the exchange rate of its currency at a fixed value of plus or minus one percent in terms of gold.
The International Monetary Fund (IMF) was formed at the conference to fight the temporary imbalance of payments. The Bretton Woods system summary is a monetary order that regulates monetary relations between an independent nation-state.
Also, make approval of rules for commercial and financial relations between the major industrial countries in the world. At the Bretton Woods conference, 730 delegates from 44 Allied World War II attended.
They held a conference in Bretton Woods, New Hampshire. The state delegates then discussed and signed the Bretton Woods Agreement in July 1944.
Work from home CFD, forex trading online with TenkoFX
TenkoFX broker regulated by IFSC Belize
History Bretton Woods System
At the end of the 19th century, the international trade system was still based on the economic system of mercantilism.
Mercantilism is a political-economic activity in which a country is more concerned with international trade with the aim of gaining assets and earning as much capital.
The general form of mercantilism is the politics of colonialism and the trade balance. The main actor in the economic system according to mercantile is a country where mercantilism is very popular for governments that encourage state power because the aim is to focus more on achieving the country’s national interests to the full.
But this trading system collapsed along with the outbreak of countries affected by world war to become commodity protectionists. Against the background of the spirit of liberalism, the idea of the Bretton Woods system has the support of the United States and Britain. And its led to a conference at Bretton Woods in 1944.
Bretton Woods Conference Goal
There are two main objectives of the Bretton Woods conference, namely:
1. Encourage reduction of tariffs and other obstacles in international trade and
2. Minimizing economic conflicts that occur between countries, one of which is preventing World War II and creating a global economic framework.
IMF is an institution created by the Bretton Woods conference included the World bank. This institution was founded in 1945
With the signing of the articles in the agreement which were the result of the 1944 Bretton Woods Conference by 29 countries, and began operating in 1947. Original Agreement Agreement is:
- Always remind international monetary cooperation for a permanent institution that provides international monetary problem services in terms of consultation and collaboration.
- Second, facilitating balanced expansion and growth efforts from international trade and encouraging an increase in the degree of labor and real sector income and encouraging productive resources as the main object of economic policy for each member;
- Improving exchange rate stability with the aim of regulating exchange rates among members, as well as preventing competition from depreciating the exchange rate;
- Assist in establishing multilateral payment system with a goal to facilitate a transaction between member country, remove barrier on foreign exchange
- They have the opportunity to correct problems in the balance of payments without using measures that exacerbate national and international welfare.
- IMF aims to accelerate the resolution of the crisis.
The World Bank also created by the Bretton Woods system. The World Bank is a financial institution originally named International Bank for Reconstruction and Development which was established together with the International Monetary Fund institution at the Bretton Woods Conference in 1944. The objectives of the establishment of the World Bank are:
- First, Provide assistance to member countries involved in the field of development and reconstruction.
- Second, increasing private investment and guaranties borrowing from private investment
Third, provide finance for productive purposes but this has certain conditions that go in to be fulfilled.
- Fourth, improving the balance of long-term growth in international trade and maintaining a balance of payments balance;
- Fifth, regulate basic policies in order to give priority to projects that have more value of benefits and value of interests;
- Sixth, influence world investment
General Agreement on Tariff and trade
The General Agreement on Tariffs and Trade is an institution resulting from the Bretton Woods Conference but was never enacted and operated under the auspices of the Protocol on Applications signed by 23 countries in 1947.
Bretton woods 3 main principles, namely:
- Non-discrimination, where trade restrictions must not be made by privileging one partner and ignoring another partner.
- Removing trade barriers, if an industry needs protection, may not use quantitative barriers, such as quotas and other non-tariff barriers.
- Hold consultations between member countries if there are disputes that may arise deliberations to resolve the problem.
The United States through the agreement has succeeded in introducing the use of US dollars on world financial transactions.
Advantages of the Bretton woods system
When compared with than in any monetary regime since 1879 and interest rates are low and stable, some of the benefits of the emergence of the Bretton woods system are as follows
- Significant expansion in international trade and investment.
- Better macroeconomic performance.
- Inflation rates are average low for every industrialized country except Japan.
- Real per capita income growth is higher.
But some leading economists today argue whether the stability of macroeconomic performance is a result of the success of Bretton Woods or just controversy.
Before the Bretton Woods world system used the gold exchange standard, and a country had to use the classic way to deflate the domestic economy when faced with a chronic deficit. Many European countries used this policy, especially Britain before World War II.
Then policymakers thought that the currency should be back up by gold and voluntarily adopted a deflationary policy after World War I. Bretton Woods accepted an adjusted devaluation as a large increase in the fixed gold exchange rate.
Currency can be converted into gold but unlike gold exchange standards. Countries have the ability to change the face value of a currency. So the Bretton Woods system is to be “the opposite of the gold standard.”
Criticism of the Bretton woods system
In its history, the Bretton Woods system is not free from various criticisms. This system is highly dominated by US and British forces. Hobsbawm (1994) even considers that the US-centered world economy will have an impact on US dominance in the next quarter-century.
The Bretton Woods regime resembles a hegemonic monetary order centered on gold-dollars or fixed exchange rates. So in this case, the ability of Bretton Woods institutions is increasingly greater in regulating the world economy through and also for the strength of the US political economy.
It causes power imbalances between countries in multilateral cooperation patterns that can cause harm to countries with weak power.
In negotiations, the capacity of one party to dominate the other party is very possible because of its influence, power, or status that is far stronger than the other party. The dominant party in question is a country with great bargaining power in various aspects such as politics and economics.
This has implications for the often found an international agreement that is not balanced or double standard in multilateral cooperation.
Bretton Woods system can’t reduce imbalance economic problem
Some data show that liberal policies in multilateral cooperation have not been able to reduce the imbalance of economic problems. In 1947, the United States formed the GATT (General Agreement on Tariffs and Trade).
GATT leads to economic liberalization by carrying out the mission of global capitalism which tends to be strongly imposed by certain countries. Both directly and through global economic-financial institutions.
It is ironic when developed countries manage to reap enormous economic benefits, but on the other hand, third world countries are still struggling with the problem of poverty.
Why does the Bretton woods system collapse?
The beginning of the collapse of the Bretton Woods system was due to the US dollar exchange rate being too high. In the early 1960s, the fixed value of the US dollar against gold. Under the Bretton Woods fixed exchange rate system, was seen as overvaluing.
Increasing domestic spending on President Lyndon Johnson’s Great Society programs. And increasing military spending in the Vietnam War gradually exacerbated the dollar’s overvaluation.
The End Bretton Woods System
Eventually, the Bretton Woods System was dissolved between 1968 and 1973. US President Richard Nixon announced the “temporary” suspension of the convertibility of dollars into gold due to conditions that were already too high in August 1971.
Throughout the 1960s the Dollar had struggled at the parity established at Bretton Woods, this crisis was a sign of system failure. In March 1973 major currencies began to float together because attempts to revive the exchange rate remained unsuccessful.
Since the collapse of the Bretton Woods system. IMF members have been free to choose any form of exchange arrangement they want to allow a free-floating currency. Whether group it into other currencies or a basket of currencies. Adopt another country’s currency, participate in a currency block or form part of a unit monetary.
Pros and cons of Bretton woods system
The Bretton Woods system is inseparable from the pros and cons of countries in the world. The originators of the American Bretton woods conference and their allies certainly fully supporting the rule that only the USD was pegged with gold.
In February 1965, the President of France, Charles de Gaulle. Stated that fixing the US dollar equivalent to gold made the US be able to owe and owe for free from other countries’ dependents. Because, what has become US debt is paid, at least in part, with dollars they can only create.
In 2004, Malaysian Prime Minister Mahathir Mohamad state a critique that the current monetary system or Bretton woods system was unfair. To eliminate this injustice, he proposed that the world returns to gold and silver as a medium of exchange.
Ready to start trading?