In the pegged exchange rate system, the US served as central reserve country and did not have to adjust to its balance of payments deficit. From 1946 to 1949, the U.S. was running an average annual balance-of-payments surplus of $2 billion. In contrast, by 1947, European nations were suffering from chronic balance-of-payments deficits, resulting in the rapid depletion of their dollar and gold reserves.

1. In contrast, upon the creation of Bretton Woods, with the U.S. producing half of the world’s manufactured goods and holding half its reserves, the twin burdens of international management and the Cold War were possible to meet at first.
2. A clause was added in case a country ran a balance of payments surplus and its currency became scarce in world trade.
3. Much of the discussions centered around the proposed bank’s dual purposes of reconstruction and development and its capital structure.
4. It would be the unit for accounting between nations, so their trade deficits or surpluses could be measured by it.
5. Discussions were largely dominated by the interests of the two great economic superpowers of the time, the United States and Britain.

Policies

The remedies that followed often worked in the short run but not in the long run. The main threat to the system as a whole was the Triffin problem, which was exacerbated after 1965 by expansionary US monetary and fiscal policy which led to rising inflation. But while member nations had individual incentives to take advantage of such an arbitrage opportunity, they also had a collective interest in preserving the system.

Bretton Woods Conference

Convertibility facilitated the vast expansion of international financial transactions, which deepened monetary interdependence. Keynes’ proposals would have established a world reserve currency (which he thought might be called “bancor”) administered by a central bank vested with the power to create money and with the authority to take actions on a much larger scale. Treasury in 1942–44, Harry Dexter White drafted the U.S. blueprint for international access to liquidity, which competed with the plan drafted for the British Treasury by Keynes. Overall, White’s scheme tended to favor incentives designed to create price stability within the world’s economies, while Keynes wanted a system that encouraged economic growth.

Growth of international currency markets

That this is difficult, or impossible, to do is demonstrated by the collapse of the Bretton Woods system. The suspension of dollar-gold convertibility was really the more significant change as it effectively ended the gold exchange standard and marked the death of the Bretton Woods system. With no obligation to exchange gold for dollars, the system essentially was changed to a reserve currency system. Previous constraints on the United States, caused when it runs a BoP deficit and loses gold reserves, were thus eliminated. There was no longer a possibility that the United States could run out of gold.

1. Still, there were several attempts by representatives, financial leaders, and governmental bodies to revive the system and keep the currency exchange rate fixed.
2. And European countries cooperated to maintain international dollar liquidity while limiting gold outflows from the U.S.
3. In this respect, the international system of trade and payments that Keynes and White set out to create was intended to offer a vision to which the peoples of the Allied and United Nations could aspire.
4. The stage was set for monetary interdependence by the return to convertibility of the Western European currencies at the end of 1958 and of the Japanese yen in 1964.
5. The U.K., already struggling to maintain its dollar exchange rate due to persistent FX crises, and having several times received short-term assistance from the IMF, devalued the pound in November 1967.
6. Economists and other planners recognized in 1944 that the new system could only commence after a return to normality following the disruption of World War II.

Under the Bretton Woods system, gold was the basis for the U.S. dollar, and other currencies were pegged to the U.S. dollar’s value. The Bretton Woods system effectively came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency. The second observation is that, similar to the situation prevailing at Bretton Woods, both the North and the South have challenges with respect to external imbalances. The nature of these challenges differs; but both have a mutual interest in the timely, orderly unwinding of imbalances and the continuation of the international system of trade and payments.

They could, for example, link its value to another country’s currency, or a basket of currencies, or simply let it float freely and allow market forces to determine its value relative to other countries’ currencies. More important, since the United States no longer needed to be concerned about a complete loss of gold reserves, the dollar overhang problem was “solved,” and it was free to continue its monetary growth and inflationary policies. During the following year, the United States did just what is meant by the bretton woods agreement class 10 that; within a short time, there arose renewed pressure for the dollar to depreciate from its new par values. The Gold Pool brought together the gold reserves of several European nations in order to keep the market price of gold from significantly rising above the official ratio.

In 1960, with Kennedy’s election, a decade-long effort to maintain the Bretton Woods System at the $35/ounce price began. In the case of balance of payments imbalances, Keynes recommended that both debtors and creditors should change their policies. The immediate financial impact of a rising U.S. money supply was lower U.S. interest rates, leading to extra demand for foreign currency by investors to take advantage of the higher relative rates of return outside the United States. As U.S. prices rose, U.S. goods became relatively more expensive relative to foreign goods, also leading to extra demand for foreign currency.

As with the benefits of all currency pegging regimes, currency pegs are expected to provide currency stabilization for the trade of goods and services as well as financing. As mentioned above, 44 allied nations met in Bretton Woods, NH in 1944 for the United Nations Monetary and Financial Conference. At that time, the world economy was very shaky, and the allied nations sought to meet to discuss and find a solution for the prevailing issues that plagued currency exchange.

The Bretton Woods Agreement was reached in a 1944 summit held in New Hampshire, USA on a site by the same name. The agreement was reached by 730 delegates, who were the representatives of the 44 allied nations that attended the summit. The delegates, within the agreement, used the gold standard to create a fixed currency exchange rate. The Bretton Woods experience should cast a shadow of doubt on fixed exchange rate systems more generally too. Every fixed exchange rate system requires countries to give up the independence of their monetary policy regardless of domestic economic circumstances.

Thus the potential for this type of BoP deficit could lead to speculation that the U.S. dollar would have to be devalued at some point in the future. The design of the Bretton Woods System was such that nations could only enforce convertibility to gold for the anchor currency—the United States dollar. Rather than full convertibility, the system provided a fixed price for sales between central banks. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce official price. 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. The rules of Bretton Woods, set forth 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.