Bretton Woods Agreement
The Bretton Woods Agreement was a historical first, it signified the creation of the first monetary order designed to govern currency relations between countries. What was even more astounding was this conference was taking place in the mist of World War II. Actually the World War was one of the main of the reason that the conference got under way in the first place. The Allied Powers were determined to avoid the monetary chaos that followed the end of the last Great War. It was with that in mind that all forty-four allied nations and Argentina, led by John Maynard Keyes a world renowned British economist, and Harry Dexter White the United States minister of the treasury set out to establish a new monetary system.
The conference at Bretton Woods gave birth to The International Monetary Fund (IMF). The IMF began its operations on March 1, 1947. It was designed to promote international monetary stability by establishing a global monitoring system that regulates and advises on monetary problems. The first issue they tackled was the problem with exchange rates. The floating rate system was discouraging international trade by competitive currency depreciation. The result was a world wide monetary policy system that simply wasn’t working, and could create major problems in the oncoming years of globalization. There was speculation of returning to the “gold standard”, however most governments wanted nothing to do with the gold standard of monetary policy because they wanted to be able to retain their right to revise currency values. A new monetary policy was established with the US dollar as the dominant currency. The system implemented was a par value or adjustable peg system. In this system the US dollar was set at a value of thirty-five dollars per ounce of gold. All other currencies than set their par value in relation to either gold or the US dollar. Once that par value was set the government had to limit exchange fluctuations to plus or minus one percent. The governments’ also retained their right to adjust their par value to correct a “fundamental disequilibrium” in their balance of payments. What exactly qualifies as a fundamental disequilibrium in your balance of payments was never defined.
Each member of the IMF was also required to pay a quota subscription to the IMF. The size of each quota reflected your economic importance. The United States having far and away the strongest economy at the time was required to pay the largest quota. The quota was to be paid using a seventy-five twenty-five rule. Seventy five percent of the quota was too paid in your own currency, while the other twenty-five percent was paid using either gold or a gold convertible currency (US dollars). The size of the quota also determined how much foreign currency a member can borrow, as well as [next page]