Bretton Woods Agreement and the Institutions It Created Explained

what is meant by bretton woods agreement class 10

Since the United States was contributing the most, U.S. leadership was the key. Under the system of weighted voting, the United States exerted a preponderant influence on the IMF. The United States held one-third of all IMF quotas at the outset, enough on its own to veto all changes to the IMF Charter. After the 1929 stock market crash, investors switched to commodities trading.

The U.S.-backed IMF plan sought to end restrictions on the transfer of goods and services from one country to another, eliminate currency blocs, and lift currency exchange controls. But the United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, used White’s plan but targeted many of Keynes’s concerns. White saw a role for global intervention in an imbalance only when it was caused by currency speculation. The U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.

what is meant by bretton woods agreement class 10

The US monetary authorities began to worry about the balance of payments deficit because of its effect on confidence. As official dollar liabilities held abroad mounted with successive deficits, the likelihood increased that these dollars would be converted into gold and that the US monetary gold stock would eventually reach a point low enough to trigger a run. Indeed by 1959, the US monetary gold stock equalled total external dollar liabilities, and the rest of the world’s monetary gold stock exceeded that of the US. By 1964, official dollar liabilities held by foreign monetary authorities exceeded that of the US monetary gold stock (Figure 1). In July 1945, Congress passed the Bretton Woods Agreements Act, authorizing U.S. entry into the IMF and IBRD. The two organizations officially came into existence on December 27, 1945.

Q. 5. What is meant by the Bretton Woods Agreement? (CBSE 2012, Or

IMF Archives later become the repository for the records maintained by the conference secretariat. Records related to Bretton Woods in the holdings of the World Bank Group Archives were collected as the result of Bank units and staff collecting copies for the purpose of reference, and while not insignificant, are far from complete. A key reason for Bretton Woods’ collapse was the inflationary monetary policy that was inappropriate for the key currency country of the system. The Bretton Woods system was based on rules, the most important of which was to follow monetary and fiscal policies consistent with the official peg. 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.

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In 1971, concerned that the U.S. gold supply was no longer adequate to cover the number of dollars in circulation, President Richard M. Nixon devalued the U.S. dollar relative to gold. After a run on gold reserve, he declared a temporary suspension of the dollar’s convertibility into gold. Countries were then free to choose any exchange arrangement for their currency, except pegging its value to the price of gold. They could, for example, link its value to another country’s currency, or a basket of currencies, or simply let it float freely and allow market forces to determine its value relative to other countries’ currencies. It wasn’t until 1958 that the Bretton Woods System became fully functional. Once implemented, its provisions called for the U.S. dollar to be pegged to the value of gold.

History and Functionality of the Bretton Woods Agreement

The Bretton Woods system gave nations more flexibility than strict adherence to the gold standard. It also provided less volatility than a currency system with no standard at all. A member country still retained the ability to alter its currency’s value, if needed, to correct a “fundamental what is meant by bretton woods agreement class 10 disequilibrium” in its current account balance, the Federal Reserve noted. The transition created more demand for dollars, even though its worth in gold remained the same. This discrepancy in value planted the seed for the collapse of the Bretton Woods system three decades later.

what is meant by bretton woods agreement class 10

Countries were required to monitor and maintain their currency pegs which they achieved primarily by using their currency to buy or sell U.S. dollars as needed. The Bretton Woods System, therefore, minimized international currency exchange rate volatility which helped international trade relations. More stability in foreign currency exchange was also a factor for the successful support of loans and grants internationally from the World Bank. The IMF was designed to advance credits to countries with balance of payments deficits. Short-run balance of payment difficulties would be overcome by IMF loans, which would facilitate stable currency exchange rates.

What is meant by the Bretton Woods Agreement?

Delegation led Commission II that dealt with the proposal for a bank for reconstruction and development. The commission’s committees were tasked with studying the preliminary draft presented to the conference and gathering additional suggestions and proposals. Mexico, Chile, Brazil, Russia, Belgium, the Netherlands, Czechoslovakia, Poland, Canada, China, and India were among the active participants. Much of the discussions centered around the proposed bank’s dual purposes of reconstruction and development and its capital structure.

  • Special drawing rights (SDRs) were set as equal to one U.S. dollar, but were not usable for transactions other than between banks and the IMF.
  • The design of the Bretton Woods System was such that nations could only enforce convertibility to gold for the anchor currency—the United States dollar.
  • Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend.
  • The Bretton Woods System collapsed due to an increase in value of the US dollar.
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Purchasing currency would lower the supply of the currency and raise its price. If a currency’s price became too high, the central bank would print more. This printing production would increase the supply and lower the currency’s price. Imagine all of the paperwork, draft reports, notes, correspondence, and other records generated during the conference.

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what is meant by bretton woods agreement class 10

Approximately 730 delegates representing 44 countries met in Bretton Woods in July 1944 with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth. The Bretton Woods Agreement also created two important organizations—the International Monetary Fund (IMF) and the World Bank. While the Bretton Woods System was dissolved in the 1970s, both the IMF and World Bank have remained strong pillars for the exchange of international currencies. The Bretton Woods Agreement was reached in a 1944 summit held in New Hampshire, USA on a site by the same name.

Fixed exchange rates

The planners at Bretton Woods set up a system of rules, institutions, and procedures to regulate the international monetary system. They started the International Bank for Reconstruction and Development and the International Monetary Fund . Entering Africa in the east, rinderpest moved west ‘like forest fire’ destroying almost 90 per cent of African cattle. 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.

Countries settled international balances in dollars, and US dollars were convertible to gold at a fixed exchange rate of $35 an ounce. The United States had the responsibility of keeping the price of gold fixed and had to adjust the supply of dollars to maintain confidence in future gold convertibility. The Bretton Woods system was in place until persistent US balance-of-payments deficits led to foreign-held dollars exceeding the US gold stock, implying that the United States could not fulfill its obligation to redeem dollars for gold at the official price. In 1971, President Richard Nixon ended the dollar’s convertibility to gold. The 730 delegates at Bretton Woods agreed to establish two new institutions. The International Monetary Fund (IMF) would monitor exchange rates and lend reserve currencies to nations with balance-of-payments deficits.

The Bretton Woods Agreement

The shortfall would be met by capital outflows from the US, manifest in its balance of payments deficit. Triffin posited that as outstanding US dollar liabilities mounted, they would increase the likelihood of a classic bank run when the rest of the world’s monetary authorities would convert their dollar holdings into gold (Garber 1993). According to Triffin when the tipping point occurred, the US monetary authorities would tighten monetary policy and this would lead to global deflationary pressure.

Triffin’s solution was to create a form of global liquidity like Keynes’ (1943) bancor to act as a substitute for US dollars in international reserves. The experience of World War I was fresh in the minds of public officials. The planners at Bretton Woods hoped to avoid a repetition of the Treaty of Versailles after World War I, which had created enough economic and political tension to lead to WWII. After World War I, Britain owed the U.S. substantial sums, which Britain could not repay because it had used the funds to support allies such as France during the War; the Allies could not pay back Britain, so Britain could not pay back the U.S. The solution at Versailles for the French, British, and Americans seemed to entail ultimately charging Germany for the debts. In 1958, the Bretton Woods system became fully functional as currencies became convertible.

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Indentured labourers were engaged in India under contracts that guaranteed them a return trip to India after five years of service on their employer’s plantation. (ii) The majority of indentured labourers migrated in the hope of a better future, but they were taken advantage of by both the recruitment agent and the employer. (D) 2008, Sept. 2010, 2012] Or Enumerate the importance of Silk Routes. (i) The Silk Roads are an excellent illustration of flourishing pre-modern commercial and cultural connections between different parts of the globe. (ii) Chinese businessmen exploited the silk route to export silk to other countries. (iii) Traders exploited these channels to transport commodities from one country to another.