Bretton Woods System - Explained
What is the Bretton Woods System?
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Table of ContentsWhat is the Bretton Woods System?What is the Bretton Woods Agreement?Setting Up the Bretton Woods AgreementCreation of Two New InstitutionsEnd of Bretton Woods AgreementAcademic Research on the Bretton Woods Agreement
What is the Bretton Woods System?
Bretton Woods System, developed in 1944 during the UN Monetary and Financial Conference, pins the value of currencies on the price of Gold with the US dollar acting as a reserve currency which compares to the price of gold.
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What is the Bretton Woods Agreement?
The Bretton Woods System was used in the development of IMF (International Monetary Fund) and it has been used to value gold and foreign currencies. Though it has been used to convert currencies for trade, the increasing value of the US dollar made the system unreliable after 20 years of use. It has not been used since President Richard Nixon of the US suspended it in 1971 and its dissolution between 1968 and 1973.
Setting Up the Bretton Woods Agreement
This system was designed primarily by John Maynard Keynes whose idea was to have a global central bank and Harry Dexter White whose plan was to limit the resources and powers of countries. The system was formed by borrowing ideas from both economists but leaning more towards Whites idea. The system was rolled out officially in 1958 and conversion of currencies started. At the time, countries had to settle their debts in dollars with $35 being equal to an ounce of gold.
Creation of Two New Institutions
The IMF was created in 1945 as an institution to monitor currency exchange rates and to lend dollars to nations. The agreement also saw the creation of World Bank whose goal was to offer financial assistance for countries that needed it after World War I.
End of Bretton Woods Agreement
The Bretton Woods System collapsed due to an increase in value of the US dollar. The overvaluation of the dollar raised concerns on the tie of the value of currencies to gold. President Richard Nixon suspended the system in 1971 after which governments let their currencies float and the system was ended in 1973.
Academic Research on the Bretton Woods Agreement
- An essay on the revived Bretton Woods system, Dooley, M. P., Folkerts-Landau, D., & Garber, P. (2003). (No. w9971). National Bureau of Economic Research. This paper establishes the US as the center country in the Brent Woods Agreement after a periphery with a fixed exchange rate emerged in Asia. The changes in the global monetary system involves peripheries with export led economy run by undervalued exchange rates. The periphery need to develop to centers for the Bretton Wood system to work. This should be followed by centers floating their currencies for financial liberalization.
- The revived bretton woods system, Dooley, M. P., FolkertsLandau, D., & Garber, P. (2004). International Journal of Finance & Economics, 9(4), 307-313. This paper has the same observations as the 2003 paper above. The paper sees the US as the center of the Bretton Woods System. For the system to work, emerging peripheries in Asia have to develop to centers. These currencies need to float their exchange rates for economic liberalization.
- The revived Bretton Woods system: the effects of periphery intervention and reserve management on interest rates & exchange rates in center countries, Dooley, M. P., Folkerts-Landau, D., & Garber, P. (2004). (No. w10332). National Bureau of Economic Research. This paper explores intervention in financial markets and how these interventions generate deviations in exchange rates and a countrys relative yields in the financial markets. The paper further claims that the management of the international reserves currency composition by emergence central banks and peripheral countries has no effect on the deviations.
- Exchange rate variability and the riskiness of US multinational firms: evidence from the breakdown of the Bretton Woods system, Bartov, E., Bodnar, G. M., & Kaul, A. (1996). Journal of Financial Economics, 42(1), 105-132. The paper looks at how stock return volatility is related to the exchange rate variability in multinational firms in the US. The research shows that there is a significant increase in monthly stock returns volatility with each increase in exchange rate variability and also an increase in market risk for multinational companies. China's role in the revived Bretton Woods system: A case of mistaken identity, Goldstein, M., & Lardy, N. (2005). (No. 05-2). Working Paper. This research looks at emerging peripheries in Asia and how they influence the international monetary system. It takes a keen look at the monetary systems in China and how these activities have influenced international exchange rates.
- A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed, Rose, A. K. (2007). Journal of International Money and Finance, 26(5), 663-681. This paper looks at a new international monetary system that does not require a center country. This system is run by central banks which administer domestic inflation targets while reducing the restrictions on capital flow and allowing their curriencies to float. Inflation targeters do not suffer sudden capital flow stops and they do not have lower exchange rate volatility. This system is not linked to IMF or gold and it is long lasting, making it a direct opposite of the Bretton Wood System
- Is it 1958 or 1968? Three notes on the longevity of the revived Bretton Woods system, Dooley, M. P., & Garber, P. M. (2005). Brookings Papers on Economic Activity, 2005(1), 147-209. This research looks at the drivers of capital flows and the factors within a market that affect the Bretton Woods system. It looks at the central bank reserve management practices and how they are crippling the system. It also looks at the future of the new Bretton Woods system.
- The Bretton Woods international monetary system: a historical overview, Bordo, M. D. (1993). In A retrospective on the Bretton Woods system: Lessons for international monetary reform (pp. 3-108). University of Chicago Press. This is a paper that outlines the history of the Bretton Wood system, its failures and its strengths and how that is affecting the new international monetary system. It outlines the lessons to be learned from how the system ended and how to make the global monetary system better.
- Bretton Woods II still defines the international monetary system, Dooley, M., FolkertsLandau, D., & Garber, P. (2009). Pacific Economic Review, 14(3), 297-311. This paper establishes that the increased capital inflows to the US were not responsible for the current financial crisis. While a crisis can be caused by such flows, such a crisis has not occurred. The current international monetary system still follows some of the ideas from the Bretton Wood System. If the cause of the current financial crisis is not identified, nations might resolve to protectionism which will worsen the economic crisis prevailing today.
- A Bretton Woods moment? The 20072008 crisis and the future of global finance, Helleiner, E. (2010). International affairs, 86(3), 619-636. This paper looks at financial crisis of 2007-2008 and how entities speculated a global conference like the one that led to the formation of the Bretton Wood Agreement. However, these speculations never came to be as the financial crisis is still not a sore issue. The Bretton Wood Agreement was formed after a series of crises in the financial, political and power arenas among others which have not been witnessed today. For a new monetary system to be developed, a legitimate crisis needed. The 2007-2008 financial crisis was legitimate and it already triggered international reform initiatives whose details are still unresolved.