Bretton Woods System

Topics: Bretton Woods system, Currency, Foreign exchange market Pages: 8 (2712 words) Published: July 12, 2012


MM202 International Business


Essay Topic No. 2 Describe the most important features of the Bretton Woods Agreement. Why did the Bretton Woods ‘system’ break down and what has replaced it?

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In July, 1944, 730 delegates from the 44 Allied nations got together and hold an international conference (Bretton Woods conference) for three weeks in Bretton Woods, New Hampshire. During this conference, Bretton Woods Agreement was signed and passed (Investopedia, 2005, para.1). The Bretton Woods Agreement is an agreement which regards U.S. dollar as a central part of international monetary system after the Second World War. It then established a capitalist world’s monetary system called Bretton Woods system. This system was a Gold Exchange Standard. It relied on U.S. dollar and gold, then treated U.S. dollar and gold as solid foundation (Investopedia, 2005, para.2).The core content of Bretton Woods Agreement is liberalization of foreign exchange, capital account liberalization and trade liberalization. Its original purpose is to rebuild the world after the World War II though a series of currency stabilization programs and infrastructure loans to war-ravaged nations (Investopedia, 2005, para.3). Bretton Woods Agreement's major outcomes comprise the International Monetary Fund and the International Bank for Reconstruction & Development’s formation, moreover, it suggested introducing an adjustable pegged foreign exchange rate system (Wiggin, 2006, para.3).The establishment of the Bretton Woods system promotes the capitalist world's economic recovery and development after the World War II. This essay will discuss the most significant features of the Bretton Woods Agreement, in addition, it will illustrate why Bretton Woods system broke down and what has replaced it.

A. The most important features of the Bretton Woods Agreement There are six important features of the Bretton Woods Agreement. The first feature of the Bretton Woods Agreement is among the Currency Conversion Rate. After World War II, the variation of international monetary system is not based on the mint par of other countries to identify the exchange rate, it is according to the comparison of different foreign currency’s legal gold parity. After that, building a fixed proportional relationship with U.S. dollar (Griffiths, 2009, para.4). The second important feature is that exchange rate’s regulatory mechanism varies. Before the World War II, the gold point was automatically regulated by its exchange rate’s fluctuations. However, after World War II, the range of exchange rate’s fluctuations is all regulated by men. The fluctuations of exchange rate are always supervised by some fund organizations, and then some countries interfere with the market of foreign currency to regulate these fluctuations (Griffiths, 2009, para.5). The third important feature is about the difference between the levels of currency exchange. In the condition of international standard gold system, every country’s currency is freely exchanged. People never take any measures to limit international payments. In the Bretton Woods system, a large number of countries cannot make their currency exchange freely, in this way, there are some limitations for external payments. Absolutely, some fund organizations have already made some rules, these rules say people should not impose some restrictions on the payments of current account, at the same time, they formulate when every requirement is ready, all of the limitations should be canceled and then people should try their best to make free currency exchange come true (Griffiths,2009,para.6). The fourth features of the Bretton Woods Agreement are about the international reserve. In the condition of standard gold system, gold account for the largest portion of international reserve assets. After the World War II, international reserve assets are consisting of gold, convertible currency and special drawing...
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