Bretton Woods system

In 1944, representatives of 44 countries met at Bretton Woods, New Hampshire.
Idea: devise a NEW international monetary system.

Defence against:
- Collapse of the gold standard;
- Repeat of Great Depression from 1930’s.
- Worldwide financial collapse;
- Competitive devaluations;
- Trade wars;
- High unemployment;
- Hyperinflation;
- General economic disintegration.

Plan: build an enduring economic system that would facilitate post-war economic growth.

Result:
1. Two new institutions created:
- IMF;
- World Bank;
2. A fixed exchange rate system:
- IMF polices it;
- All countries set their exchange to gold;
- NO ONE [except US dollar] has to ACTUALLY exchange into gold.
- All participating countries agreed to keep within 1% of the par value by buying or selling currencies or gold.

IMF

Avoid the chaos that occurred between the wars, through a combination of discipline and flexibility.

Read the Articles of Agreement and study the IMF members' quotas and voting powers.

Fixed exchange rate imposes discipline via:
- Avoidance of competitive devaluations;
- Imposing of financial discipline on countries [thus curtailing price inflation];

Flexibility.
Was built into the system to avoid:
- Breakdown [like the gold standard];
- High unemployment in countries;

IMF would lend countries short-term to HELP ride through the tribulations [balance-of-payments deficits].
IMF loans would:
- Give countries time to reduce inflation and BoP;
- Reduce pressures for devaluation;
- Allow for a more orderly and less painful adjustment;

Increasing amounts of money drawn from IMF = acceptance of increasingly stringent IMF supervision of macroeconomic policy and agreeing to IMF conditions concerning monetary and fiscal growth:
- Targets on domestic money supply;
- Exchange rate policy;
- Tax policy;
- Government spending;

Date: 2015-01-29; view: 913