What Does This Term Mean in Common Usage?
- Bretton Woods Conference or the UN Monetary and Financial Conference was conducted in Bretton Woods, USA, with the aim to regulate the international monetary and financial order post World War II.
- The outcome of this conference resulted in the formation of the Bretton Woods twins - International Bank for Reconstruction and Development (IBRD) and International Monetary Fund (IMF).
The Rules of the Bretton Woods System
- It sought to create a collective, international currency exchange rate regime.
- The currency system worked on a fixed-yet-adjustable system where most nations would peg their currencies to the dollar and the dollar would peg it to the value of gold.
- Current account restrictions would be lifted while capital controls were permitted.
- Compliance would be secured with the IMF and IBRD/ World Bank. IMF was to monitor exchange rates and help countries in currency crisis or dire straits to overcome the same through monetary support. IBRD was to provide financial assistance to countries across the world and offer loans and grants to the governments.
- However, there was no definitive timeline to implement these rules and the system has found many failures in its tenure of operation.
Impact of Bretton Woods System
- It resulted in the start of an era of unprecedented growth for western industrial nations and Japan.
- There was a big lift provided to world trade, where it grew at the rate of nearly 8% per annum.
- There was a huge spread of technology and enterprise.
- The gulf between the industrialised and underdeveloped nations increased.
- The hegemony of the west increased with greater control over the economy of the world. For instance, there was a rise of dollar imperialism.
Causes for the Demise of the Bretton Woods System
- Though the Bretton Wood twins continue to exist, the spirit of the Bretton Woods has long been wiped away. It was short lived due to the following reasons –
- The adjustment problem in Bretton Woods has resulted in the rigidity of wages and prices, greater unemployment rates and recessions.
- The liquidity of the dollar was a cause of concern as elimination of the US balance of payments deficit will create a global liquidity shortage.
- The end of the Bretton Woods System resulted in the adoption of the managed floating exchange rate system.
