What Caused The End Of The Bretton Woods Agreement
Together, these three measures led to a rapid renegotiation of the Bretton Woods system, culminating in the 1971 Smithsonian AgreementA, which sought to save the Bretton Woods system. December 1971. In this agreement, non-reserving countries agreed to an average revaluation of their currency against the dollar of 8% on average, in exchange for the abolition of the import premium. They also increased the range of values by 1% to 2.25 per cent. Revaluations have, of course, “devalued” the dollar. The United States also devalued dollars in terms of gold, bringing the price to $38 per ounce. However, since the United States did not agree to reopen the golden window, the change in the price of gold made no sense. The Bretton Woods exchange rate system was an imperfect system that has suffered many pressures in its history. Yet, for nearly thirty years, it has reached fixed exchange rates among its members.
In Benjamin Cohen`s article, you will find a more detailed, if brief, presentation of the history of the system. Benjamin Cohen, Bretton Woods System, www.polsci.ucsb.edu/faculty/cohen/recent/bretton.html. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations, to oversee the new system. Hyperinflation has caused the value of money to fall so dramatically that, in some cases, people need wheelbarrows full of money to buy a loaf of bread. The Bretton Woods countries have decided not to give the IMF the power of a global central bank. Instead, they agreed to contribute to a solid pool of national currencies and gold, which would be held by the IMF. Each member country of the Bretton Woods system then had the right to borrow as part of its dues, which it needed. The IMF was also responsible for implementing the Bretton Woods agreement.
In response to a dangerous loss of value caused by excessive currency circulation, President Nixon began to defy the value of the dollar`s gold. Nixon devalued the dollar at 1/38 of an ounce of gold and then at 1/42 of an ounce. There was broad consensus among powerful nations that the lack of exchange rate coordination during the interwar period had exacerbated political tensions. This facilitated the decisions of the Bretton Woods conference. In addition, all the Bretton Woods governments agreed that the monetary chaos of the interwar period had brought some valuable lessons. As chief international economist at the U.S. Treasury, Harry Dexter White designed the U.S. Cash Access Project in 1942/44, which rivaled Keynes`s plan for the British Treasury.
Overall, White`s system tended to favour incentives to create price stability in the world`s economies, while Keynes wanted a system that promoted economic growth. The “collective agreement was a huge international undertaking,” which took two years before the conference to prepare for it.