Officially created on December 27, 1945, when the 29 participating countries signed their articles of agreement at the Bretton Woods Conference, the IMF was to be the guardian of the rules and the main instrument of international public administration. The Fund began its financial activities on March 1, 1947. IMF approval was required for any exchange rate changes greater than 10 per cent. It advised countries on policies affecting the monetary system and lent reserve currencies to countries that had taken on balance of payments debt. These new forms of monetary interdependence have enabled huge capital flows. At the time of Bretton Woods, countries were reluctant to formally change exchange rates, even in the face of structural imbalances. Since these changes have had a direct impact on certain national economic groups, they have been seen as political risks for Heads of State and Government. As a result, official exchange rates have often become unrealistic from a market perspective, offering speculators a virtually risk-free temptation. They could move from a weak currency to a strong currency, hoping to make a profit when a revaluation takes place. However, if monetary authorities manage to avoid appreciation, they could return to other currencies without loss.
The combination of risk-free speculation with the availability of huge sums of money was very destabilizing. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations that would oversee the new system. Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. When the value of a country`s currency became too low against the dollar, the bank bought its currency on the foreign exchange markets. The Bretton Woods countries decided not to give the IMF the power of a global central bank. Instead, they agreed to contribute to a fixed pool of national currencies and gold that would be held by the IMF. Each member of the Bretton Woods system then had the right to borrow what it needed as part of its contributions. The IMF was also responsible for the implementation of the Bretton Woods agreement. Despite the economic efforts imposed by such a policy, the fact that they were at the center of the international market gave the United States unprecedented freedom of action in the pursuit of its foreign policy objectives.
A trade surplus made it easier to keep armies abroad and invest outside the United States, and because other countries could not support operations abroad, the United States had the power to decide why, when, and how to intervene in global crises. The dollar continued to act as a compass to guide the health of the global economy, and exporting to the United States became the main economic objective of developing or redeveloping economies. This arrangement was called Pax Americana, by analogy with the Pax Britannica of the late 19th century and the Pax Romana of the first. (See Globalism) Powerful countries strongly agree that the failure to coordinate exchange rates in the interwar period exacerbated political tensions. This facilitated the decisions of the Bretton Woods Conference. In addition, all Bretton Woods governments agreed that the monetary chaos of the interwar period had brought valuable lessons. Post-war world capitalism suffered from a huge shortage of dollars. The U.S.
ran huge trade surpluses, and U.S. reserves were huge and growing. This river had to be reversed. Although all countries wanted to buy U.S. exports, the dollars had to leave the U.S. and become available for international use to do so. In other words, the US should reverse the imbalances in global prosperity by posting a trade deficit financed by an outflow of US reserves to other countries (a US budget deficit). The United States could suffer from a financial deficit by importing, building factories or donating to foreign countries. Remember that speculative investments were prevented by the Bretton Woods agreements. Importing from other countries was not attractive in the 1950s, as American technology was up to date at the time. Multinationals and U.S.
global aid have flourished. [29]. The immediate cause of the global depression was a structurally flawed and mismanaged international gold standard. . For a variety of reasons, including the Federal Reserve`s desire to contain the United States. A stock market boom, monetary policy in several major countries became contractionary in the late 1920s – a contraction that was transmitted by the gold standard around the world. What was initially a light deflationary process began to snowball when the banking and monetary crisis of 1931 triggered an international “gold rush.” The sterilization of gold inflows by surplus countries [the United States and France], the substitution of foreign exchange reserves by gold, and rushes to commercial banks led to an increase in the gold support of the currency and, consequently, to a sharp involuntary decline in the national money supply. Monetary contractions, in turn, were strongly linked to lower prices, output and employment. Effective international cooperation could, in principle, have enabled global monetary expansion despite the constraints of the gold standard, but disputes over reparations and war debts during World War I, as well as the insularity and inexperience of the Federal Reserve, prevented this outcome, among other things. As a result, individual countries could only escape the deflationary vortex by unilaterally abandoning the gold standard and restoring domestic monetary stability, a process that dragged on and without coordination until the France and other gold-block countries finally left gold in 1936.
—Great Depression, B. Bernanke The IMF was not designed to print money and influence economies with the help of monetary policy. To prepare for the rebuilding of the international economic system while World War II was still raging, 730 delegates from the 44 Allied countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. Delegates deliberated from 1 to 22 July 1944 and signed the Bretton Woods Agreement on the last day. With the establishment of a system of rules, institutions, and procedures to regulate the international monetary system, these agreements created the IMF and the International Bank for Reconstruction and Development (IBRD), now part of the World Bank Group. The United States, which controlled two-thirds of the world`s gold, insisted that the Bretton Woods system be based on both gold and the U.S. dollar. Soviet representatives attended the conference, but later refused to ratify the final agreements, claiming that the institutions they created were “branches of Wall Street.” [1] These organizations began their work in 1945 after a sufficient number of countries had ratified the Convention. A devastated Britain had little choice. Two world wars had destroyed the country`s main industries, which paid to import half of the country`s food and almost all its raw materials except coal. The British had no choice but to ask for help. It was only when the United States signed an agreement on December 6, 1945, to provide Britain with $4.4 billion in aid, that the British Parliament ratified the Bretton Woods Accords (which took place later in December 1945).
[24] Financial crises during THE TERM OF US President Richard Nixon led to the end of the Bretton Woods system. During these years, the amount of dollars held abroad exceeded the value of gold reserves held by the United States at Fort Knox and elsewhere. This undermined the premise of the deal, which was that the US could still hedge its dollars with its gold equivalent. The Bretton Woods system is a set of uniform rules and guidelines that created the framework for the creation of fixed international exchange rates. Essentially, the agreement provided for the newly created IMF to set the fixed exchange rate for currencies around the world. Each country represented took responsibility for maintaining the exchange rate, with incredibly tight margins above and below. Countries struggling to stay in the fixed exchange rate window could ask the IMF for an interest rate adjustment, which would then be the responsibility of all allied countries to comply. In July 1945, Congress passed the Bretton Woods Agreements Act, which authorized U.S. membership in the IMF and IBRD.
Both organizations were officially established on December 27, 1945. .
