Bretton Woods System In response to the failures of Global economic management during 1920s & 1930s.

American stock market crashed in Oct., 29. In Europe financial crisis occurred in 1931. This resulted in collapse of I. M. S., with spiral of rising prices, falling production, bankruptcies & rising unemployment. Further many countries to protect their economies went in for protectionism thereby fuelling the collapse further. World trade contracted violently, further disrupting production. Against this backdrop, representatives of allied Nations met at Mount Washington Hotel in Bretton Woods to lay plans for the post war monetary order to replace the failed Gold Standard; Objectives were : 1. To establish I.M.S. with stable exchange rates. 2. Te eliminate existing exchange controls. 3. To bring about convertibility of all currencies. Multilateral Institutions were set to oversee New Post War economic Order. 1) IMF 2)WB C) ITO Characteristics Envisaged to build new order on a fixed but adjustable exchange rate. a. It enshrined Gold as the central value & numeriare (standard for currency exchange rate of a fixed parity system). Member Countries of IMF to state parities in Gold or USD Central Banks to maintain that parity within + or - 1%. b. These values could be altered only if the IMF certified that it was needed to correct fundamental disequilibrium. c. USA pledged to allow USD to be feely convertible against Gold @ USD 35/= per ounce. d. Regulated issues concerning international reserves and credits. A reserve was build by contribution by member countries. 25% in Gold & 75% in the countries own currency. They could borrow upto 100% of Gold tranche without IMF approval. To

borrow an addl. 100% of its contribution in 4 steps with stringent conditions being stipulated by IMF. The system worked well till late 60s since countries were less willing to alter their exchange rates because Down means confession of economic mismanagement. & Up Means condonation of mismanagement of others & blow to vocal export groups. U S. $ became a dominant currency & source of basic intl. Monetary reserves. Weakness of the system Triffins Dilemma Seigniorage France started selling US for Gold. In 1967, GBP devalued from US $ 2.80/pound to US $ 2.40/pound. In 1968, 2 tier gold pricing system was established. In SDRs were established & allocated. In 1971 Nixon administration broke away by disallowing convertibility of USD against gold. Smithsonian Agreement :- Agreement of IMF members was reached in Dec. 71 in which US to raise official Gold price from US $ 35 to US $ 38 (7.9% US Devaluation) European Countries & Japan to revalue their currencies. Intervention points were widened to + 2.25% But it did not resolve the basic problem of Gold Convertibility. June 72, GBP under attack & then it was let to float. Later Canada, Germany, Holland, Switzerland & Japan erected barriers against capital.