The Bretton-Woods The Bretton-Woods ConferenceConference

June 1944June 1944

FoundersFounders

Harry Dexter White -Harry Dexter White -Chief International Chief International Economist at the U.S. Economist at the U.S. Treasury Treasury

John Maynard Keynes John Maynard Keynes – U. K. Treasury – U. K. Treasury AdvisorAdvisor

44 Delegate Nations44 Delegate Nations    Australia                    IndiaAustralia                    India Belgium                     IranBelgium                     Iran Bolivia                      IraqBolivia                      Iraq Brazil                     LiberiaBrazil                     Liberia Canada                     LuxembourgCanada                     Luxembourg Chile                     MexicoChile                     Mexico China                     NetherlandsChina                     Netherlands Colombia                   New ZealandColombia                   New Zealand Costa Rica                 NicaraguaCosta Rica                 Nicaragua Cuba                     NorwayCuba                     Norway Czechoslovakia          PanamaCzechoslovakia          Panama    Dominican Republic   ParaguayDominican Republic   Paraguay Ecuador                     PeruEcuador                     Peru Egypt                     PhilippinesEgypt                     Philippines El Salvador                PolandEl Salvador                Poland Ethiopia                     Union of South AfricaEthiopia                     Union of South Africa France                     Union of Soviet Socialist Republics France                     Union of Soviet Socialist Republics

(USSR)(USSR) Greece                     United KingdomGreece                     United Kingdom Guatemala                United StatesGuatemala                United States Haiti                     UruguayHaiti                     Uruguay Honduras                  VenezuelaHonduras                  Venezuela Iceland                     YugoslaviaIceland                     Yugoslavia

Major AccomplishmentsMajor Accomplishments

International Monetary FundInternational Monetary Fund International Bank for Reconstruction International Bank for Reconstruction

and Developmentand Development

(focus on IMF)(focus on IMF)

Policies of the Depression eraPolicies of the Depression era

High tariff barriersHigh tariff barriers Competitive currency devaluationsCompetitive currency devaluations Discriminatory trading blocsDiscriminatory trading blocs

These policies adopted after WWI created an unstable international environment

Bretton-Woods goal: sustainable peace and prosperity through economic cooperation

International Monetary FundInternational Monetary Fund&&

Monetary Policy Monetary Policy

Fixed exchange rates Fixed exchange rates (The U.S. dollar tied to gold at $35 an ounce)(The U.S. dollar tied to gold at $35 an ounce)

1) Restrained monetary expansion1) Restrained monetary expansion

a) Loss of international reserves by foreign banks a) Loss of international reserves by foreign banks meant banks would be unable to maintain the meant banks would be unable to maintain the fixed dollar exchange rate. fixed dollar exchange rate.

b) U.S. obligation to redeem foreign b) U.S. obligation to redeem foreign accumulation accumulation of dollars for gold restricted U.S. of dollars for gold restricted U.S. monetary monetary growth. growth.

Creation of the Fund Creation of the Fund

Member countries contributed there Member countries contributed there currencies and gold to the fund.currencies and gold to the fund.

From this the IMF could lend to countries From this the IMF could lend to countries experiencing balance of payment experiencing balance of payment difficulties (short-term) avoiding currency difficulties (short-term) avoiding currency devaluation.devaluation.

If necessary changes in the exchange rate If necessary changes in the exchange rate could be made.could be made.

An adjustable exchange rate was not An adjustable exchange rate was not available to the U.S. dollaravailable to the U.S. dollar

Convertible CurrencyConvertible Currency

Convertible currency - one that may Convertible currency - one that may be freely exchanged for foreign be freely exchanged for foreign currencies.currencies.

Increased efficiency for multilateral Increased efficiency for multilateral trade.trade.

The U.S. and Canada became The U.S. and Canada became convertible in 1945convertible in 1945

Most European Countries waited until Most European Countries waited until 1958, Japan followed in 1964 1958, Japan followed in 1964

World CurrencyWorld Currency

It’s ease of conversion and the It’s ease of conversion and the prominence given to it from the Bretton-prominence given to it from the Bretton-Woods agreement quickly gave rise to the Woods agreement quickly gave rise to the U.S. dollar as the world reserve currency.U.S. dollar as the world reserve currency.

International trade was conducted in dollar International trade was conducted in dollar denominations.denominations.

Foreign central banks held their Foreign central banks held their international reserves in dollar assets.international reserves in dollar assets.

Balance of Payment CrisesBalance of Payment Crises

““Fundamental Disequilibrium” was Fundamental Disequilibrium” was thought to exist when a country thought to exist when a country maintained a continuing current maintained a continuing current account deficit.account deficit.

This may lead to a devaluation of the This may lead to a devaluation of the currency. Anyone holding this currency. Anyone holding this currency would incur a loss equal to currency would incur a loss equal to the amount of the exchange rate the amount of the exchange rate change.change.

Large current account surpluses Large current account surpluses made countries candidates for made countries candidates for revaluation.revaluation.

Selling local currency in the foreign Selling local currency in the foreign exchange market with the intent of exchange market with the intent of slowing appreciation resulted in large slowing appreciation resulted in large official reserves.official reserves.

Money supply would grow to quickly Money supply would grow to quickly which in turn would push up the price which in turn would push up the price level and disrupt the internal level and disrupt the internal balance.balance.

Fall of Bretton-WoodsFall of Bretton-Woods

Increasing balance of payment crises.Increasing balance of payment crises. U.S. currency pressure brought about U.S. currency pressure brought about

partly from cost of Vietnam War and a partly from cost of Vietnam War and a growing trade deficit.growing trade deficit.

President Nixon issued an executive order President Nixon issued an executive order in 1971 eliminating the gold standard and in 1971 eliminating the gold standard and devaluing the dollar.devaluing the dollar.

Floating exchange rates determined by Floating exchange rates determined by market trading replaced fixed exchange market trading replaced fixed exchange rates. rates.