The Bretton-Woods Conference

1
The Bretton-Woods Conference

• June 1944

2
Founders

• Harry Dexter White -Chief International Economist
  at the U.S. Treasury
• John Maynard Keynes U. K. Treasury Advisor

3
44 Delegate Nations

•   Australia                    India
• Belgium                     Iran
• Bolivia                      Iraq
• Brazil                     Liberia
• Canada                     Luxembourg
• Chile                     Mexico
• China                     Netherlands
• Colombia                   New Zealand
• Costa Rica                 Nicaragua
• Cuba                     Norway
• Czechoslovakia          Panama
•  Dominican Republic   Paraguay
• Ecuador                     Peru
• Egypt                     Philippines
• El Salvador                Poland
• Ethiopia                     Union of South
  Africa
• France                     Union of Soviet
  Socialist Republics (USSR)
• Greece                     United Kingdom
• Guatemala                United States

4
Major Accomplishments

• International Monetary Fund
• International Bank for Reconstruction and
  Development
• (focus on IMF)

5
Policies of the Depression era

• High tariff barriers
• Competitive currency devaluations
• Discriminatory trading blocs

These policies adopted after WWI created an
unstable international environment
Bretton-Woods goal sustainable peace and
prosperity through economic cooperation
6
International Monetary FundMonetary Policy

• Fixed exchange rates
  (The U.S. dollar tied to gold at 35 an ounce)
• 1) Restrained monetary expansion
• a) Loss of international
  reserves by foreign banks meant
  banks would be unable to maintain the
  fixed dollar exchange rate.
• b) U.S. obligation to redeem foreign
  accumulation of dollars for gold
  restricted U.S. monetary growth.

7
Creation of the Fund

• Member countries contributed there currencies and
  gold to the fund.
• From this the IMF could lend to countries
  experiencing balance of payment difficulties
  (short-term) avoiding currency devaluation.
• If necessary changes in the exchange rate could
  be made.
• An adjustable exchange rate was not available to
  the U.S. dollar

8
Convertible Currency

• Convertible currency - one that may be freely
  exchanged for foreign currencies.
• Increased efficiency for multilateral trade.
• The U.S. and Canada became convertible in 1945
• Most European Countries waited until 1958, Japan
  followed in 1964

9
World Currency

• Its ease of conversion and the prominence given
  to it from the Bretton-Woods agreement quickly
  gave rise to the U.S. dollar as the world reserve
  currency.
• International trade was conducted in dollar
  denominations.
• Foreign central banks held their international
  reserves in dollar assets.

10
Balance of Payment Crises

• Fundamental Disequilibrium was thought to exist
  when a country maintained a continuing current
  account deficit.
• This may lead to a devaluation of the currency.
  Anyone holding this currency would incur a loss
  equal to the amount of the exchange rate change.

11

• Large current account surpluses made countries
  candidates for revaluation.
• Selling local currency in the foreign exchange
  market with the intent of slowing appreciation
  resulted in large official reserves.
• Money supply would grow to quickly which in turn
  would push up the price level and disrupt the
  internal balance.

12
Fall of Bretton-Woods

• Increasing balance of payment crises.
• U.S. currency pressure brought about partly from
  cost of Vietnam War and a growing trade deficit.
• President Nixon issued an executive order in
  1971 eliminating the gold standard and devaluing
  the dollar.
• Floating exchange rates determined by market
  trading replaced fixed exchange rates.