34099492600325BY:Fayrouz Salem (20163315)Rana AbdelHamid (20161998)Romaisa Alaa (20162638)Sally Lutfi ( 20162768)Salma Mohamed (20160911)00BY:Fayrouz Salem (20163315)Rana AbdelHamid (20161998)Romaisa Alaa (20162638)Sally Lutfi ( 20162768)Salma Mohamed (20160911)centercenterSystem of Bretton WoodResearch Paper Department of Economics and Political ScienceFuture UniversitySupervised by: Dr. AsmaaApril 20199410077300System of Bretton WoodResearch Paper Department of Economics and Political ScienceFuture UniversitySupervised by: Dr. AsmaaApril 2019It was clear during the Second World War that a new international system would be needed to exchange the Gold Standard after the war ended. The Bretton Woods system, negotiated in July 1944, established a new international monetary system.
It was developed by representatives from 44 countries at the United Nations Monetary and Financial Conference held that month in Bretton Woods. US political and economic dominance required the dollar being at the center of the system. the major motive of the Bretton Woods system is correcting the problems of the post-war I era which was characterized by International economic disorder, with fixed exchange rates seen as necessary for trade, but also for more flexibility than the traditional Gold Standard had provided.
The Bretton Woods system was drawn up and fixed the dollar to gold at the existing equality of US $35 per unit, while all other currencies had fixed, but adjustable, exchange rates to the dollar. Unlike the classical Gold Standard, capital controls were allowed to enable governments to stimulate their economies without suffering from financial market drawbacks.The objectives of the IMF are to encourage international monetary cooperation by establishing a global monitoring agency that oversees, consults, and cooperates on monetary problems. It enables world trade expansion and thus contributes to the promotion and maintenance of high levels of employment and real income. Furthermore, the IMF ensures exchange rate stability to avoid competitive exchange depreciation. It removes foreign exchange restrictions and assists in creating systems of payment for multilateral trade. Moreover, member countries with disequilibrium in their balance of payments are provided with the opportunity to precise their problems by making the financial resources of the IMF available for them. The overall proposed objective was consequently stable exchange rate and possible promotion of world peace.The benefits of the Bretton Woods system were a significant expansion of international trade and investment as well as a notable macroeconomic performance: the rate of inflation was lower on average for every industrialized country but Japan than during the period of floating exchange rates that followed, the real per capita income growth was higher than in any monetary system since 1879 and the interest rates were low and stable in that time.Under the gold exchange standard, a country has to an alternative to the classical medicine of deflating the domestic economy when it faced a chronic balance of payment deficits. Before World War II, European nations often used this policy, in particular, Great Britain. Even though that few currencies were exchangeable into gold, policy makers thought that currencies should be backed by gold and freely adopted deflationary policies after World War I. Deflationary policy is not the only option when it faced with a balance of payment deficits.Did Bretton Woods succeed in achieving its goals?In one way, it eventually did not; since the rejection of the gold standard, all world currencies float against one another as situation necessarily less stable than the domination of the U.S. Dollar from 1944 until 1971. Aside from the rejection of the establishment of the Bretton Woods started gold standard, there is no clear answer to the question. Both the World Bank and the IMF exist today as itself a remarkable success in the instable world, but they are widely criticized. These criticisms center on the processes and approaches taken by both institutions.The main reason that led to the breakdown of Bretton Woods was the rise in inflation in the US that created in 1965 because the system as a whole was reliant on the stability of the dollar. Increasing the importance of other currencies such as the Japanese yen and the European currencies.On August 15, 1971, the president Richard Nixon publicized that to stop exchange the dollar currency to gold which is pull the plug on the IMF Bretton Woods system. In its final form, the Bretton Woods Monetary Agreement that created the IMF was unworkable because it lacked a mechanism to adjust persistent payments imbalances between countries. Exchange rate stability could only be maintained by given that increasing amounts of “liquidity,” a process that created huge political difficulties and finally undermined confidence in the IMF system.The IMF plan, unlike a pure gold standard, confirmed the primacy of domestic economic goals, which included the maintenance of full employment economies over the firm balance of payments concerns. But exchange rate stability can only be continued when there is comparable price stability between countries, a close impossibility. If the prices change markedly because of inflation or deflation in a given domestic economy, then currency exchange rates must shift accordingly or else their first par rates what will quickly be reduced. When exchange rates are not changed to reflect price shifts, the balance of payments deficits and surpluses quickly occur. Such a situation would be especially difficult if the first par values were already out of line, which was often the case under the IMF Bretton Woods system because nations were given wide discretion to establish their own ratesAs a conclusion, the Bretton Woods System of 1944 with its fixed exchange rates that don’t exist anymore today. Its institutions and processes that had to adjust to market forces to continue but still its goals are as valid today as they have been in the past. Today many large developed countries allow their currencies to float freely, which means that only supply and demand at the market determine what it is worth. Some nations try to impact this process by buying and selling their own currency. Another method is to peg the value of the money to one of the main currencies.References: