On July 1944, forty four allied nations and one neutral nation met for three weeks at a conference held in Bretton Woods, New Hampshire to reach an agreement on governing monetary policy among nations. The result was Bretton Woods agreement which gave rise to a system popularly known as the Bretton Woods system. It was the result of some 2.5 years of planning for post war monetary reconstruction by the Treasuries of the UK and US. The discussion was dominated by the plans submitted by Harry Dexter White of the U S Treasury and John Maynard Keynes of Britain. The agreement that emerged from the discussion was much closer to White's plan than to that of Keynes, reflecting the greater bargaining power the U S had achieved by the end of World War II. The institutions IMF and IBRD (today’s World Bank) were founded following the agreement.
There were four points that particularly standout from the Bretton Woods agreement:
1. Firstly the negotiators generally agreed that there were fundamental disadvantages of unrestricted flexibility of exchange rates clearly exhibited in the interwar period. The negotiators were unwilling to return to fixed rates model and also wished to retain the rights of revising the values of currencies depending on the circumstances. This gave birth to 'pegged rate' currency regime, also known as the par value system. The governments were required to declare a par value of their currency and were intervening in the currency markets to limit exchange rate fluctuation within one percent above or below parity and also retained the right to alter the par value in case of a ‘fundamental disequilibrium’ in their balance of payments, the notion of which was not spelled out in detail.
2. The governments were effectively willing to retain the advantages of Gold standards by removing the ineffectiveness of the prevalent Gold standard system. International liquidity were to consist primarily of national stocks of gold or currencies convertible into gold (Dollar). Each member nation was assigned a quota in IMF which was a pool of national currencies and gold. Members were obligated to pay 25 percent in Gold or convertible currency and 75 percent in its own currency. Each member was then reserved to borrow the foreign currency in determined by its quota size.
3. The members were forbidden to engage in any discriminatory currency practices with only two exceptions. First, convertibility obligations were extended to current international transactions only. Second, convertibility obligations could be deferred if a member so chose during a postwar 'transitional period.' IMF was responsible to oversee the legal code governing currency convertibility.
4. Finally, negotiators agreed that there was a need for an institutional forum for international cooperation on monetary matters. To avoid currency troubles that were accelerated during the interwar years was greatly attributed to the absence of any inter-governmental consultation. The IMF thus formed had member nations which had the right to vote. However US by retaining one third of all IMF quotas became the effective veto over future decision-making.
The Bretton Woods System that was hence formed defined a monetary system with unchanged gold exchange standard supplemented only by a central pool of gold, convertible currencies (Dollar) and national currencies. At the centre was the formation of IMF which performed the functions of regulating, financing and consulting.
Sources:
http://www.imf.org/external/np/arc/eng/fa/bwc/s1.htm
http://www.reuters.com/article/2011/02/19/us-g20-fx-idUSTRE71I2YZ20110219
http://www.telegraph.co.uk/finance/financetopics/g20-summit/8335920/G20-Paris-last-ditch-China-deal-saves-summit.html
Wiggin, Addison., 2006 . Bretton Woods Agreement. The Daily Reckoning Australia & Port Phillip Publishing Pty LTD, Australia 10 Feb 2011 ].
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