The Bretton Woods Agreement

Following the end of World War II the allies where faced with the challenge of developing a postwar monetary system. In 1944 they meet in the Bretton Woods of New Hampshire. About two and one half years had gone into the planning of the postwar monetary  system that was to be used by the Treasuries of the U.K. and the U.S. and Forty four allied nations and neutral Argentina. A system was designed to legal binding obligations among these allied nations to form an international organization, the IMF, International Monetary Fund. Two rival plans were developed; one by the U.S. represented by Harry Dexter White and the other by the U.K. represented by John Maynard Keynes. Ultimately a compromise was agreed too that resembled the U.S. plan to a greater extent. In order to solve the monetary chaos that occurs during post and interwar periods their judgement was to form the Articles of Agreement of the IMF.

What emerged was the 'pegged rate' or also know as the 'adjustible peg' currency system which obligated members to declare a par value (a 'peg') for their national money and to intervene within maximum margins that were agreed upon.

They agreed on several items which resulted in what was the 'pegged rate' monetary regime which became known as the 'par value system'. They also agreed that if exchange rates did not float freely, countries would require adequate supplies of monetary reserves. If some countries could not supply this reserve a supplementary source would of these funds should be established. What eventually emerged was a system of subscriptions and quotas embedded in the IMF. The members of the IMF where then permitted to borrow monies in amounts regulated by the size of its quota.

Another point on which all the governments agreed upon was to end the economic warfare that occurred during the 1930s. A system of rule was created to ensure fairness in currency practices. The IMF was responsible to oversee these new rules of fairness governing currency transactions.

Most importantly they agreed that there was need for an institutional forum for international cooperation on monetary policy. The IMF in the postwar years did provide such a forum.

Putting all these agreements together essentially created and defined the Bretton Woods Agreement or System. The IMF which was at the center of this agreement was hoped to perform three important tasks:

1. Regulatory administration of the rules governing currency
2. Financial (supplying supplementary monies as needed)
3. Consultative (a forum for cooperation among governments)

All however did not go as smoothly and as optimistically hope for right after the end of the war and even to this very day. The United States eventually became the leading economic contributor and responsible entity to carry on the tasks of the IMF. The U.S. managed to keep an open market, to continue the flow of money and grants first through the Marshall Plan and eventually through the finally reopened New York market. Also the U.S. continued a lending policy for the provision of short term funds in times of crisis.

Though a multinational agreement in formal design quickly became the U.S.'s Bretton Woods Agreement and the U.S. dollar the exchange standard and to this day remains so. For a period of time during the "cold war" the U.S. welcomed this control and the world did not mind having a source of liquid capital as needed in crises or perceived crises. The system eventually broke down in the early 1970s for many reasons.

I will share more with you about the demise of the Bretton Woods Agreement in future blogs. Promise!