What is bretton woods system?
What is the Bretton Woods system? The Bretton Woods system is an agreement in 1944 for the global monetary system.
Replace the gold standard with US dollars as an international currency standard. America is a superpower that has an important role in the Bretton Woods agreement.
After signing the agreement, America, which is only one country that has the right to print dollars.
The Bretton Woods System is a world economic system that resulted from a conference held at Bretton Woods New Hampshire in 1944.
This conference was from a collaboration between the United States and Britain which had several key features.
From here then born to three world financial institutions namely the International Monetary Fund, the World Bank, and the World Trade Organization.
Establishing The Bretton Woods system in order to resolve the battle between domestic autonomy and international stability.
But the foundations in the system of autonomy of national policies, fixed exchange rates, and the ability to change currencies from each other were contradictory.
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What is the Bretton woods system
Bretton Woods was negotiating in July 1944 to set up a new monetary system.
At the Bretton Woods conference, there were 44 countries involved in this agreement at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire.
Under the Bretton Woods system agreement.
Gold became the basis for the US dollar and other currencies were pegged to the value of the US dollar.
The central banks of the countries promised to keep the value of the currency fixed against the USD.
If the currency is too high they will decrease by buying USD on the foreign exchange market, by reducing the supply it will lower the value of the currency.
If the currency is too high and the central bank increases printing more money this will cause inflation, then in this way, it becomes a monetary system to prevent inflation.
The treaty member countries promised to avoid trade wars.
For example, they would not lower the value of the currency strictly to increase trade.
But they set their currencies under certain conditions.
How Bretton woods agreement replaced Gold standard
Before the Bretton Woods agreement, most countries used gold as the standard of money, with each country guaranteeing their money with gold.
So if at any time people will redeem money, it will follow the price of gold.
After Bretton Woods, the gold standard does not apply, and the USD replaces gold as the currency standard.
The reason for making USD as a currency standard is because the US has three or fourths of the world’s gold reserves, no other country can back up gold as a replacement.
Bretton Woods allows countries in the world to make the transition from gold to USD.
As a result of the Dollar replacing gold, this makes the demand for the USD increase.
So that this currency tends to strengthen against other countries’ currencies.
But the problem is the gold reserves remain the same, so this is what then makes the collapse of the Bretton woods system.
History of Bretton Woods
At the end of the 19th century, the international trade system was based on the economic system of mercantilism. The mercantilist economic goal is to prosper the country by including as much income as possible into the state treasury.
The main actor in the economic system according to mercantilists is a country. Where mercantilism is very popular for governments that encourage state power.
Because the aim is to focus more on achieving the country’s national interests to the full. But this trading system was destroyed along with the outbreak of World War I.
Which affected countries to become protectionists of commodities or goods from outside and the unstable currency system during the war.
Against the backdrop of the spirit of liberalism, the idea was supported by the United States and Britain. Which aimed to increase economic transactions based on conditions of equal access to markets. And the spirit of liberalism led to a conference at Bretton Woods in 1944.
Bretton Woods Conference Goal
There are two main goals of the Bretton Woods conference, namely:
- Encourage the reduction of tariffs and other obstacles in international trade.
- Making a global economic order to minimize economic conflicts that occur between countries, and prevent World War II.
IMF and World Bank
The two major financial institutions of the world were created by the Bretton Woods system agreement.
They are the IMF (International Monetary Funds) and the World Bank
The International Monetary Fund was established in 1945.
This is the result of the 1944 Bretton Woods Conference by 29 countries.
Began operating in 1947. as stated in Article 1 of the Original Agreement Agreement are:
- Trying to enhance international monetary cooperation that provides consulting and collaboration services for international monetary matters.
- Provide balanced expansion facilities and growth efforts from international trade and encourage increased levels of labor and real sector income and encourage productive resources as the main objects of economic policy for each member.
- Strive to improve exchange rate stability, to regulate the exchange rates of member countries, and prevent competition from depreciating exchange rates.
- Assist in the establishment of a multilateral payment system that aims to facilitate transactions between member countries and remove barriers to foreign exchange that will prevent growth in world trade.
- They have the opportunity to fix problems in the balance of payments without using measures that worsen national and international welfare.
- IMF aims to accelerate the resolution of the crisis caused by imbalances in the balance of payments of member countries.
World Bank is a financial institution before is the International Bank for Reconstruction and Development.
It was established together with the International Monetary Fund institution at the Bretton Woods Conference in 1944.
The goal of the establishment of the World Bank are:
- Helping member countries in terms of development and reconstruction.
- Increasing foreign private investment in the scope of increased guarantees or participation in borrowing and other types of investments made by private investors.
- Provide finance intended for productive purposes.
- Trying to improve the balance of long-term economic growth in international trade and trying to maintain a balance of payments.
- Set basic policies by prioritizing projects that have more benefits and interests.
- build an operation that aims to affect international investment in terms of business conditions in member countries.
General agreement on tariffs and trade
The General Agreement on Tariffs and Trade is an institution by through the Bretton Woods Conference.
But was never enacted and operated under the auspices of the Protocol on the Provision of Applications signed by 23 countries in 1947.
However, this institution changes its name to the World Trade Organization.
It is the Official institution launch on 1 January 1995 through the Uruguay Round.
After going through a series of long negotiations for approximately 7 years.
The purpose of the establishment of this institution is to make general principles and rules in order to liberalize international trade.
Through multilateral agreements by reducing barriers made by each country relating to trade and eliminating all forms of discrimination among member countries.
Unlike other institutions created through the Bretton Woods Conference, this institution has 3 main principles, namely
- Without discrimination, which may not create trade restrictions by privileging one partner and ignoring the other partner.
- Elimination of trade barriers, if an industry requires protection, it is not permissible to use quantitative barriers, such as quotas and other non-tariff barriers.
- Consultation among member countries to resolve disputes that may arise.
Bretton Woods system Collapse
In 1971, the US was worried that their gold supply would no longer be sufficient to cover the number of dollars in circulation.
Because of these conditions, President Richard M. Nixon declared a temporary suspend of conversion of dollars into gold.
Eventually, in 1973 the Bretton Woods System collapsed.
Countries that previously used the USD standard were then free to choose exchange arrangements for their currencies, except to group their values with the price of gold.
These countries then correlate their value with other countries ‘currencies or allow them to float freely and allow market forces to determine their value relative to other countries’ currencies.
This is the history of forex trading in general.
1. What is the meaning of the Bretton Woods system?
The Bretton Woods system is a system for controlling the value of money between various countries.
That means that every country must have a monetary policy that keeps the exchange rate of its currency at a fixed value plus-minus one percent against gold.
2. What is the purpose of the Bretton Woods system?
The purpose of the Bretton Woods conference is to create a regulatory system, and new procedures for the world’s major economies to ensure economic stability.
So Bretton Woods creating the International Monetary Fund (IMF) and the World Bank.
3. What replaced the Bretton Woods system?
The United States unilaterally ended the convertibility of the US dollar to gold on August 15, 1971, and effectively ended the Bretton Woods system, then made the dollar a fiat currency.
4. What are the main features of the Bretton Wood system?
The main feature of the Bretton Woods system is the obligation for each country to follow monetary policy rules to maintain the exchange rate of its currency at a fixed value of plus or minus one percent against gold and the IMF functions to bridge the temporary payment imbalance.
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