The Historical Development of the International

Financial Market from Bretton Woods

Essay question:

To analyse the development of monetary

institution: the beginning of Bretton Woods

system and its collapse

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Table of Contents

Table of Contents............................................................................................................................1

Abstract...........................................................................................................................................2

Introduction....................................................................................................................................2

Section I: Bretton Woods system...................................................................................................4

Section II: The rise of monetary systems and the theory of International Monetary System . .....5

2.1 Monetary Theory..................................................................................................................6

2.2 The Gold Standard................................................................................................................7

2.3 Fixed market.........................................................................................................................7

Section III: The IMF role in operation under the Bretton Woods system......................................9

Section IV: The role of World Bank under the Bretton Woods system.......................................10

Section V: Bretton woods broke down and the end of its system................................................11

Section VI: International monetary system after the Bretton Woods system in 1971.................13

6.1 Current International Monetary System.............................................................................13

6.2 Floating exchange rate........................................................................................................14

6.3 Current IMF........................................................................................................................15

6.4 World Bank Today.............................................................................................................17

Section VII: European Snake in tunnel........................................................................................18

Section VIII: European Monetary System (EMS)........................................................................19

Conclusion....................................................................................................................................20

Assessment of the system for contemporary for financial global environment...........................22

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Abstract

This paper introduced the system of Bretton Woods which was established in 1944. Starting

with the economic situation after World War I, this essay outlines the importance of creating a

supranational organisation promoting international trade flows and monetary stability. It aims to

prevent currency competition and promoting monetary co-operation among nations. By the time

of Bretton Woods System, International Monetary Fund (IMF) and World Bank were also

established to support the Monetary Theory under Bretton Woods System. The gold standard,

along with the fixed exchange rates was used during the Bretton Woods International Monetary

System but however, later in 1971, Bretton Woods System collapsed and the fixed exchange

rate has been changed to the floating exchange rates instead.

The IMF and World Bank continue to help the developing countries and carrying over 10,000

projects worldwide.1 Although, the international monetary system has collapsed, the European

countries agreed to maintain stable exchange rates by preventing exchange fluctuations and

established the European Monetary System. This arrangement was called the European ‘snake

in the tunnel’2 because the community currencies floated as a group against outside currencies

such as the dollar. This summary will be the guidance for the learner to explore more

information from this essay.

Introduction

In times of globalisation, the economic environment is changing rapidly. Capital movements

have become larger and at the same time less controllable. Therefore, the need for a stabilising

system has become more and more apparent. In the past such a system has been established at

the conference of Bretton Woods. Recently leading industrial nations have been calling for a

renewal of the purpose and the spirit of this system in order to cope with the growing size of

international trade and capital flows.3

This essay gives a short overview of the development of monetary institution with the beginning

of Bretton Woods system and its collapse, especially problems and difficulty. It identifies

1 Bretton Woods Project, What is the Bretton Woods Project? (2006) <http://www.brettonwoodsproject.org/project/about.shtml > at 18 September 2009.2 Horst Ungerer, ‘et al’, The European Monetary System: Recent Development (1st ed, 1986) 5.3 Paul R. Krugman and Maurice Obstfeld, International Economics- Theory & Policy (7th, 2006) 485.

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mistakes that have been made and points out aspects that have to be taken into account when

implementing a system similar to the International Monetary System and Breton Woods

system.4

Under the Bretton Woods system, there were two financial institutions launch to promote the

economic development and an open world economy. The primary goal was to encourage growth

and international economic cooperation by allowing goods and capital to flow around the world

as liberally as possible.5 The IMF was designed to promote an open world economy by

encouraging monetary cooperation, currency convertibility, international liquidity, and the

elimination of exchange restrictions, all of which are vital to the expansion of foreign trade and

investment.6 The World Bank was established to support foreign investment directly by

providing guarantees to private investors, participating in private loans, and, when private

capital is not available on reasonable terms, investing its own capital.7

However, this essay also covers the information that relates to the Bretton Woods system,

including the IMF and World Bank that performed in the past and up until today. Moreover, as

countries have different currencies, and the currency of one country cannot be used to buy goods

from another. Most countries maintained the official par values of their currencies by

intervening in the foreign exchange market.8 Thus, it is necessary for importers to convert

money into the currency of the countries from which they are purchasing goods. The floating

exchange rates have now been used instead of fixed exchange rates after the Bretton Woods

Collapsed.9 The information regarding this point will be discussed in further in this essay.

Briefly, this essay is organized into eight sections with additional information in sections.

Section I will provide information about the Bretton Woods system then Section II will explain

the rise of monetary systems and monetary theory. Section III is about the operation of the IMF

4 Sabine Dammasch, The System of Bretton Woods: A lesson from history (2007) The Hidden Mysteries <http://www.hiddenmysteries.org/money/policy/b-woods.pdf> at 27 July 2007.5 Bernhard Boockmann and Axel Dreher, ‘The contribution of the IMF and the World Bank to economic freedom’ (2003) 19(3) European Journal of Political Economy 634 <http://www.sciencedirect.com> at 25 June 2003.6 Sidney Dell, ‘The History of the IMF’ (1986) 14(9) World Development 1203.7 Anne O. Krueger, ‘The Role of the World Bank as an International Institution’ (1983) 18 Carnegie-Rochester Conference Series on Public Policy 281. 8 Prabirjit Sarkar, ‘The World Bank and the IMF as international economic institutions’ (1990), Roskilde University IDS Paper Series <http://ssrn.com/abstract=1021552 > at 20 June 2008.9 Jonathan Stevenson, Preventing Conflict: The Role of the Bretton Woods Institutions (1st ed, 2000) 8.

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under the Bretton Woods system. Section IV is about the role of World Bank under the Bretton

Woods system. Section V will detail the underlying cause of the Bretton woods breakdown and

the end of its system. Section VI will explain the formal changes in international monetary

system after the Bretton Woods system in 1971. The European currency system will explain in

Section VII and VIII. This essay explores critical issues and developments that have affected the

system’s creation and evolution.

Section I: Bretton Woods system

In the mid 20th century, the Bretton Woods system established the rules for commercial and

financial relations between the world’s major industrial countries. The Bretton Woods system is

commonly understood to refer to the international monetary regime that prevailed from the end

of World War II until the early 1970s.10 Taking its name from the site of the 1944 conference

that created the International Monetary Fund (IMF) and World Bank, the Bretton Woods system

was the first example of a fully negotiated monetary order intended to govern currency relations

among sovereign states.11 The Bretton Woods Agreement was also aimed at preventing currency

competition and promoting monetary co-operation between nations. Under the Bretton Woods

system, the IMF member countries agreed under the system of exchange rates that could be

adjusted within defined parities with the U.S. dollar or, with the agreement of the IMF, changed

to correct a fundamental disequilibrium in the balance of payments. A per value system

remained in use from 1946 until the early 1970s.12

Advocates of the Bretton Woods system believed that stable exchange rates would avoid the

‘beggar thy neighbour’ policies of the 1930s and benefit economies around the world by

expanding international trade.13 However, exchange rates became uncompetitive over time

because of the infrequent changes in parities. In addition, there were often large destabilising

flows of currency, as speculators bet on the value at which the fixed exchange rate would be re-

10 Benjamin J. Cohan, ‘Bretton Woods System’ in Barry Jones (ed.), On the System of Bretton Woods (2002) Routledge Encyclopedia of International Political Economy 4.11 Ibid.12 Ibid.13 Ibid.

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fixed.14 There were also concerns that a fixed exchange rate system did not allow countries

enough freedom to pursue their own monetary and fiscal policies.15

Section II: The rise of monetary systems and the theory of International Monetary System

The International Monetary System (IMS) was founded in 1985 as one of the largest publicly

traded barter companies in the world which was continually expanding its network worldwide.16

The network of IMS enables companies to acquire new business, create cost savings and

improve operations by taking advantage of barter opportunities in their business models. The

International Monetary System is the rules and procedures for the exchange of different national

currencies.17 Under IMS System, different national currencies are exchanged for each other by

rules and procedures which are necessary for its system to define a common standard of value

for the world currencies.18 And since each country sets its own rules on how the value of its

currency will be allowed to vary against other currencies, there are no formal rules for IMS.19

IMS has two types of rate change systems which are fixed rate and flexible rate systems. A

fixed-rate exchange system is one in which different countries have agreed upon the rates at

which their various currencies will be exchanged in international trading, or one in which one

country has a fixed-exchange rate for its own currency which it is prepared to defend.

Nevertheless, before the floating exchange rate system was used, all the currency matters

existed among the western industrial countries. However, the floating-exchange rate system

permits each currency to find its own level of exchange, which will change from time-to-time,

as economic conditions change.20

14 James C. Ingram, International Economics (1st ed, 1983) 173.15 James Powell, Bretton Woods agreement: Developing a New International Monetary System (2007) Canadian Economy <http://www.canadianeconomy.gc.ca/English/economy/1944Bretton_woods.html> at 4May 2007.16 Barry Eichengreen, Globalizing Capital: A history of the International Monetary System (2nd ed, 2008) 2. 17 Ibid.18 Ibid.19 Robert Solomom, The International Monetary System, 1945-1981 (2nd ed, 1982). 20 Eichengreen, above n 16, 59.

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Section 2.1 Monetary Theory

Under the macroeconomics system, monetary theory is one of the important sub areas which

aim to explain the role and relationship of money in its system. It is also analyses the role of

money in terms of demand and supply of money in such an economic system.21 One sector of

the macroeconomic system is conceived as the monetary sector, and the monetary sector has a

natural tendency to converge to monetary equilibrium. A stock market crash can be attributed to

an excess demand for money relative to supply, causing stockholders to sell stocks to raise

money.22 Theoretically, the macroeconomic system converges to equilibrium and one necessary

condition for macroeconomic equilibrium is monetary equilibrium. Monetary theory usually

assumes as a rough approximation that the money supply is fixed by monetary authorities, and

can be changed as necessary for the public’s interest. The demand for money, however, is

outside the control of public officials and is a function of other economic variables, particularly

aggregate income, interest rates, the price level, and inflation.23

For the explanation of monetary theory in depth, the macroeconomic system adjusts to bring the

demand for money in line with the supply of money when monetary authorities change the

money supply.24 But if the economic is in recession and the money supply is increase, the extra

money will be stimulating all businesses.25 On the other hand, as the demand for money grows

and the money supply is increased, the economic is at full employment, the extra money will

cause as its follow the increasing of the demand and supply chains. 26 In fact, the inflation will

happen if the real value of money supply hasn’t fallen sufficiently after prices go up.27

Section 2.2 The Gold Standard

The international gold standard developed out of the commodity money standards that prevailed

for many centuries up through and including the nineteenth. It was in a sense, the industrial

revolution, or more broadly the technological and organizational advances associated with the

21 Molly Thurman, Monetary Theory (2006) e- articles <http://e-articles.info/e/a/title/Monetary-Theory/> at September 2006.22 Ibid.23 Ibid.24 Ibid.25 Ibid.26 Ibid.27 Ibid.

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advent of modern economic growth.28 The gold standard was also an international standard

determining the value of a country’s currency in terms of other countries’ currencies. The gold

standard system is the specification standard which using only gold to be the standard of value

for circulation between nations of gold coins.29 Meanwhile, the nation that exported more than

imported would receive payment as gold which is such an influx of gold rises priced. 30 For

instance, the higher prices resulted in decreasing the demand for exports, an outflow of gold to

pay for the now relatively cheap imports, and a return to the original price level. Once this

movement toward the gold standard was introduced, it gains momentum. The shift to gold fed

on itself through the operation of network externalities. There were advantages, in other words,

to maintaining the same monetary arrangement as other countries.31

However, the gold standard is not currently used by any government or having been replaced

completely by fiat currency. During World War I the gold standard broke down, as major

belligerents resorted to inflationary finance, and was briefly reinstated from 1925 to 1931 as the

Gold Exchange Standard. Under this standard, countries could hold both gold and Dollars or

Pounds as reserves, except for the United States and the United Kingdom, which held reserves

only in gold.32 This version broke down in 1931 following Britain’s departure from gold in the

face of massive gold and capital outflows. Moreover, the government of nations were using the

lack the monetary policy, the economies under such its system was unable to avoid monetary.

Section 2.3 Fixed market

At the Bretton Woods international conference in 1944, a system of fixed exchange rates was

adopted, and the International Monetary Fund International Monetary Fund (IMF), specialised

agency of the United Nations, established in 1945. It was planned at the Bretton Woods

Conference (1944), and its headquarters are in Washington, D.C.33

28 Michael D. Bordo and Barry Eichengreen, ‘The rise and fall of a Barbarous Relic: The Role of Gold in International Monetary System’ in Guillermo Calvo, ‘et al’ (eds.), Money, Capital, Mobility and Trade: Essays in honor of Robert Mundell (2001) 53. 29 Ibid 54-55.30 Ibid.31 Ibid 55-56.32 Michael D. Bordo, Gold Standard, ‘The Gold Standard, Bretton Woods and other Monetary Regimes: An Historical Appraisal’ (Working Paper NoW4310, Harvard University, Department of Economics; National Bureau of Economic Research (NBER), 1993). 33 Dammasch, above n 4.

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Under the agreement, the dollar remains convertible into gold and all countries were use the

value of gold to fix their currency but not to exchange their currency for gold. According to the

gold-exchange standard, the system allow nations fix the value of their currencies not with

respect to gold, but to some other foreign currency, which is in turn fixed to and redeemable in

gold. 34 Most nations fixed their currencies to the U.S. dollar and retained Dollar reserves in the

United States, which was known as the key currency country.35 Under the fixed rate system,

Government maintains target rates and if rates are threatened, central banks buy and sell

currency.36 However, the advantage of this fixed rate system is that it has the stability and

predictability. On the other hand, disadvantage will occur as the country loses control of

monetary policy which can be noted that monetary policy can always be used to control an

exchange rate.37 Moreover, the disadvantage of fixed rate exchange is that if a fixed rate may

devalue as an alternative to devaluation, the country may impose currency controls.38

A fixed exchange rate regime imposes discipline in two ways. First, the need to maintain a fixed

exchange rate puts a brake on competitive devaluations and brings stability to the world trade

environment. Second, a fixed exchange rate regime imposes monetary discipline on countries,

thereby curtailing price inflation.39 Although monetary discipline was a main objective of the

Bretton Woods agreement, it was recognised that a strict policy of fixed exchange rates would

be too flexible. It would probably break down just as the gold standard had in the history. In

some cases, a country’s attempts to reduce its money supply growth and correct a persistent

balance of payments deficit could force the country into recession and create high

unemployment.40

Section III: The IMF role in operation under the Bretton Woods system

The IMF was founded to help restore economic stability and growth in the repercussion of the

World War II. Half a century later, the institution is still working to promote these goals.

However, the world has changed. In particular, the international economy is now dominated by

34 Ibid.35 Bordo, above n 32.36 Michael D. Bordo and Finn E. Kydland, ‘The Gold Standard As a rule: An Essay in Exploration’ (1995) 32 Explorations in Economic History <http://www.sciencedirect.com.simsrad.net.ocs.mq.edu.au> [424] at 29 April 2002.37 Ibid 425-638 Ibid 427.39 Charles Hill, Global Business Today (5th ed, 2008) 330.40 Ibid 331.

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massive private capital flows, flows that are opening new opportunities for investment, trade,

and growth to an ever larger number of countries.41

The agreement reached at the Bretton Woods established two multinational institutions, the IMF

and the World Bank. The IMF was established in 1945 and became operated in March 1947. It

had an original membership of 44, which now increased to 150 countries. As membership of the

World Bank is conditional upon IMF membership, it has also about 150 country shareholders.

Almost all the countries of the capitalist world and many socialist countries such as China,

Hungary, and Poland have joined the IMF World Bank organisation.42 The duty of the IMF

would be to maintain order in the International Monetary System (IMS) and that of the World

Bank would be promoting general economic development.43 The Bretton Woods agreement also

called for a system of fixed exchange rates that would be policed by the IMF.44 In its final form

the Bretton Woods Monetary Agreement was unworkable because it lacked of mechanism to

regulate persistent payments imbalances between countries.45 The ensuing balance-of-payments

disequilibria were a constant source of monetary instability in the IMF Bretton Woods system. 46

The aim of the Bretton Woods agreement was to avoid a repetition of that chaos through a

combination of discipline and flexibility.

The IMF position is to loan foreign currencies to members during their short periods of balance

of payment deficiency, when a rapid tightening of monetary or fiscal policy would harm

domestic employment. Countries were to be allowed to borrow a limited amount from the IMF

without adhering to any specific agreement.47

41 Rosa M. Lastra, ‘The International Monetary Fund In Historical Perspective’ (2000) 3(3) Journal of International Economic Law [507] < http://jiel.oxfordjournals.org/cgi/content/abstract/3/3/507> at September 2000.42 Sarkar, above n 8, 2.43 Ibid.44Barry Eichengreen, Global Imbalances and the Lessons of Bretton Woods, (1st ed, 2007) 39.45Francis J. Gavin, International Monetary Fund and World Bank - The flaws of the imf bretton woods system (2009) Encyclopedia of the New American Nation < http://www.americanforeignrelations.com/E-N/International-Monetary-Fund-and-World-Bank-The-flaws-of-the-imf-bretton-woods-system.html> at 2 November 2009.46 Ibid.47 Hill, above n 39, 331.

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Section IV: The role of World Bank under the Bretton Woods system

The World Bank was originally established to support reconstruction in Europe after World War

II, but since reframe its mission and expanded its operations both geographically and

substantively.48 World Bank policy packages are more inspired by ideology and pre-conceived

theory than derived from concrete analysis of specific country situations.49 The World Bank

provides technical assistance and funding for projects and policies to encourage development in

poor countries.50 Under the circumstances, the operations of Word Bank will realize the

countries’ potential by viewing the development as a long-term, integrated endeavour. The Bank

gives particular attention to projects that can directly benefit the poorest people in developing

countries.51 Each year, The World Bank provides over $24 billion in assistance to developing

and transition countries.52 Every project supported by the Bank is intended to work collaboration

with national governments and local agencies, and regularly in cooperated with other

multilateral assistance organizations.53

For instance, The Bank is helping the developing countries to be more efficient to gain access to

such necessities as safe water and waste-disposal facilities, health care, family-planning

assistance, nutrition, education, and housing.54 There have also been changes to infrastructure. In

transportation projects, World Bank has paying attention to farm-to-market road, power and

lighting for villages and small farms rather than in cities.55 Industrial projects, the Bank

supporting small enterprises in development of using oil, gas, coal, fuel wood and biomass to be

the alternative sources of energy.56

At present, the World Bank has become the key financier of development projects in developing

countries. It has also become the Third World's largest creditor and also become the world’s

48 Bank information Center, Overview of World Bank (IBRD & IDA) < http://www.bicusa.org/en/Institution.5.aspx> at 10 November 2009.49 Sarkar, above n 8, 8.50 David Driscoll, ‘The IMF and the World Bank: How Do They Differ?’ (1996) International Monetary Fund < http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm> at August 1996.51 Ibid.52 Bank information Center, above n 48.53 Driscoll, above n 50, 6.54 Ibid 5.55 Ibid 6.56 Ibid .

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leading development agency.57 It has improved after the World Bank's failure to achieve its

major mission of poverty improvement is now recognized at the most significant levels of the

Bank itself under Bretton Woods’s system.58 The World Bank Group now is consist of five

separated arms, which are the International Bank for Reconstruction and Development (IBRD),

the International Development Association (IDA), both of IBRD and IDA work primarily with

governments, the International Finance Corporation (IFC) and Multilateral Investment

Guarantee Agency (MIGA) directly support private businesses investing in developing

countries. The fifth arm is the International Center for Settlement of Investment Disputes

(ICSID), which arbitrates disagreements between foreign investors and governments.59

Section V: Bretton woods broke down and the end of its system

Bretton Woods is a place in New Hampshire. The meeting held for planning and sharing of

political view such as the experience after the Great Depression. It is also create international

basis for exchanging in one currency by setting the standard to another countries. The agreement

was signed to set up the three big global institutions which are IMF, IBRD (now is one of the

World Bank Group) and the International Trade Organization (ITO).60 But as a result, the ITO

never came established. According to the final conference of Bretton Woods, Mr. President has

mentioned that the Bretton Woods members have shown that forty four nations are able to work

together for the constructive task in amity and unbroken concord.61 However, the President was

also right to think that the Final Act at Bretton Woods was a magnificent achievement. Bretton

Woods symbolise a different class of cooperation. It was a shift away from the tacit, convention-

based cooperation of central bankers to a sweeping, rule-based, multilateral cooperation of

states.62

During the 1930s, the states facing many problems such as the instability of the exchange rate,

the shortage of gold and the lack of methods to adjust balance of payments.63 Since then, the

57 The 1995 People's Summit (P7), Halifax Initiative: Beyond 50 Years <http://www.chebucto.ns.ca/Current/P7/bwi/cccbw.html> at 2002.58 Ibid.59 Bank information Center, above n 48.60 John Braithwaite and Peter Drahos, ‘Bretton Woods: Birth and Breakdown’ (2001) Global Business Regulation [97] < http://vangogh.fcjs.urjc.es/~jesus/Teaching/MFI/Temario_files/Bretton%20Woods.pdf> at April 2001.61 Ibid 98.62 Ibid.63 Ibid.

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IMF had revaluation some scope under IMS system to deal with all the difficulties.64 The World

and ITO aim to assist Europe and development countries for industrial reconstruction to achieve

industrialisation and to stop the balance of payments problems.65

After the war, the whole Bretton Woods system broke down. The thing that broke down was the

rules of cooperation for the convertibility of the dollar into gold and the exchange rates regime.

On the other hand, the US has run to insufficiency after provided the liquidity in IMS and the

US dollar became the international reserve currency.66 And if the shortage continued, other

countries would distrustful in the Dollar as a reserve currency and result in exchange their

dollars into gold. However, the deficits continued to increase even if the US tried to attempt to

correct its balance of payment because the US had to pay for its war in Vietnam.67

Thus, the US announced in August 1971 to abandon the convertibility of the dollar because the

decrease of the confidence in US dollar and the seeking to conversion of their dollars into gold

from States.68 The exchange rates regime under Bretton Wood ended with other state were

forced to float their own currencies. There was the minor matter that the US and other states

were in breach of the IMF agreement. The real problem lay in deciding on a new form of

cooperation for exchange rates.69

Furthermore, there were some discussion mentioned that Bretton Woods was successful because

it embodied a series of assignment rules for economic policy instruments.70 The rules were to

use monetary and fiscal policy to maintain internal balance with also to use international

reserves to finance temporary departures from external balance and to use changes in the

exchange rate to attain medium run external balance. However, the system was so short operated

because the equilibrium was based on a series of coincidences, an equilibrium configuration of

exchange rates, adequate reserves, and confidence worries not sufficient to topple the system.

An adaptive mechanism to restore balance was non-existent once the coincidences vanished.71

64 Dell, above n 6, 1210.65 Braithwaite and Drahos, above n 60, 99.66 Ibid 100.67 Eichengreen, above n 44, 99.68 Braithwaite and Drahos, above n 60, 98.69 Ibid 98-9.70 Krugman and Obstfeld, above n 3, 554.71 Michael D. Bordo and Barry Eichendreen, A Retrospective on the Bretton Woods system (1st ed, 1993) 107.

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Section VI: International monetary system after the Bretton Woods system in 1971

After 1971, the IMF lost its sense of purpose as guardian of the international monetary system.

The international monetary system was scrapped for flexible exchange rates. At the end of 1996,

every country has its own system.72 An international monetary system on the strict sense of the

world does not presently exist.73 Under the impression of IMS, large numbers of employees of

banks and financial institutions has to carry out their work under a set of rules individually and

the internal control for the operational stability has been removed74

The world’s monetary officials were deliberating the problem of international liquidity in the

period of 1966-1971. They had been discussing this problem for several years but they were by

no means agreed that the supply of liquidity in the international monetary system was actually

inadequate or that unusual new arrangements for creating liquidity were necessary.75 In addition,

the unstructured nature of the current international monetary system is apparent in the way it

deals with each of the three fundamental tasks of any monetary system which were supplying

international liquidity, determining exchange rates, and providing an international framework

for national economic policies.76 However, the reform of the international monetary system has

not been on the political agenda for many years after Bretton Woods system collapsed.

Section 6.1 Current International Monetary System

After Bretton woods collapsed, the European countries agreed to maintain stable exchange rates

by preventing exchange fluctuations. This arrangement was called the European ‘snake in the

tunnel’ because the community currencies floated as a group against outside currencies such as

the dollar.77 However, a new effort to achieve monetary cooperation was launched. EC

72Robert A. Mundell, ‘The International Monetary System in the 21st Century:Could Gold Make a Comeback?’ (1997) Center for Economic Policy Studied [3] <http://www.robertmundell.net/pdf/The%20International%20Monetary%20System%20in%20the%2021st%20Century.pdf> at 12 March 1997.73 Ibid.74 Hugo S. Price, The international monetary process (2005) Gold-Eagle <http://www.gold-eagle.com/editorials_05/salinas070505.html> at 5 July 2005.75 Magaret Garritsen de Vries, The International Monetary Fund 1966-1971: the system under stress (1976) 4.76 Peter B. Kenen, ‘et al’, International Monetary System (1st ed, 1994) 1.77 Daniel P. Kane, Principles of International Finance (1st ed, 1988) 118.

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established European Monetary System, and created the European Currency Unit (ECU).78 The

European Monetary system (EMS) was launched as a bridge to help lead the ultimate goal of

Economic and Monetary Union (EMU).79 Since then, the European leader were keen to maintain

the principle of exchange rate and faced many difficulties in setting the right rate for all

European members and wasn’t entirely successful because some member was less committed to

it than others. 80 The important part of EMS is to commit all member governments to keep their

currencies exchange rates/ within bands. This particular role was designed to help create stable

commerce without the fear of sudden changes in the value of currencies.

Section 6.2 Floating exchange rate

Floating exchange rate is known as a floating currency. This currency is set by the foreign

exchange market through supply and demand for that particular currency relative to other

currencies.81 The central bank needs to keep the stability of the market of buying or selling

currencies to avoid the instability of the exchange rate from getting too high or too low.82

However, there are some advantages of the floating exchange rates such as full employment,

stable growth and price stability.83 In the Meantime, the Exchange rate adjustment has purposed

to promote those goals by work as an automatic stabilizer.84

Also, a government wanting to maintain a fixed exchange rate does so by either buying or

selling its own currency on the open market. This is one reason governments maintain reserves

of foreign currencies. If the exchange rate drifts too far below the desired rate, the government

buys its own currency off the market using its reserves. This places greater demand on the

market and pushes up the price of the currency. If the exchange rate drifts too far above the

desired rate, the opposite measures are taken.85

78 Krugman and Obstfeld, above n 3, 631.79 Civitas-the Institute for the study of Civil Society, European Monetary System, <http://www.civitas.org.uk/eufacts/FSECON/EC9.htm> at 24 September 2007.80 Ibid.81 Atish R. Ghosh, ‘et al’, Exchange rate regimes choices and consequences (1st ed, 2002) 40-2.82 All Business, Dictionary of Banking: floating exchange rate <http://www.allbusiness.com/glossaries/banking/4941812-1.html> at 2 November 2009.83 Policy Archive, ‘Fixed Exchange Rates, Floating Exchange Rates, and Currency Boards: What Have We Learned?’ (2004) CRS Report for Congress < https://www.policyarchive.org/bitstream/handle/10207/1311/RL31204_20040123.pdf?sequence=1> at 23 Jan 2004.84 Ibid.85 Wikipedia, Fixed exchange rate <http://en.wikipedia.org/wiki/Fixed_exchange_rate> at 16 October 2009.

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Section 6.3 Current IMF

The IMF is an organization that formed with a stated objective of stabilizing international

exchange rates and facilitating development which is located in Washington, D.C., in the United

States.86 The IMF initiated with 29 nations but there are now about 186 countries become

members. The term ‘country’ also refers to some territory areas that are not states. The IMF is

working to foster global monetary cooperation, secure financial stability, facilitate international

trade, promote high employment and sustainable economic growth, and reduce poverty around

the world.87 IMF current task is to monitors the world's economies by keeping track of economic

developments on a national, regional, and global basis, consulting regularly with member and

providing them with macroeconomic and financial policy advice. IMF also provides practical

guidance and training on how to upgrade institutions, and design appropriate macroeconomic,

financial, and structural policies to third world countries. The main mission of IMF is to provide

loans to countries that have trouble meeting their international payments and cannot otherwise

find sufficient financing. This financial assistance is designed to help countries restore

macroeconomic stability by rebuilding their international reserves, stabilising their currencies,

and paying for imports—all necessary conditions for re-launch growth.88

International Monetary Fund (IMF) members

Afghanistan Algeria Argentina Australia Austria Azerbaijan,

Republic of

Bahamas, The Bahrain

Bangladesh Barbados Belarus Belgium Belize Benin Bhutan Bolivia

86James Boughton, ‘The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution’ (IMF Working Paper WP/04/75, International Monetary Funds, 2004) 7.87 Sarkar, above n 8, 10.88 International Monetary Fund, About the IMF < https://www.imf.org/external/about/ourwork.htm> at 2 November 2009.

16

Bosnia and

Herzegovina

Botswana Brazil Brunei

Darussalam

Bulgaria Burkina Faso Burundi Cambodia

Cameroon Canada Cape Verde Central

African

Republic

Chad Chile China Colombia

Comoros Congo,

Democratic

Republic of

the

Congo,

Republic of

Costa Rica Côte d'Ivoire Croatia Cyprus Czech Republic

Denmark Djibouti Dominica Dominican

Republic

Ecuador Egypt El Salvador Equatorial

Guinea

Eritrea Estonia Ethiopia Fiji Finland France Gabon Gambia, The

Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau

Guyana Haiti Honduras Hungary Iceland India Indonesia, Iran, Islamic Republic of

Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan

Kenya Kiribati Korea Kosovo Kuwait Kyrgyz Republic

Lao People's Democratic

Republic

Latvia

Lebanon Lesotho Liberia Libyan Arab Jamahiriya

Lithuania Luxembourg Macedonia, former

Yugoslav Republic of

Madagascar

Malawi Malaysia Maldives Mali Malta Marshall Islands

Mauritania Mauritius

Mexico Micronesia, Federated States of

Moldova Mongolia Montenegro Morocco Mozambique, Republic of

Myanmar

Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway

Oman Pakistan Palau Panama Faso Papua New Guinea

Paraguay Peru Philippines

Poland Portugal Qatar Romania Russian Federation

Rwanda St. Kitts and Nevis

St. Lucia

St. Vincent and the Grenadines

Samoa San Marino São Tomé and

   Príncipe

Saudi Arabia Senegal Serbia Seychelles

Sierra Leone Singapore Slovak Republic

Slovenia Solomon Islands

Somalia South Africa Spain

Sri Lanka Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Republic

Tajikistan

Tanzania Thailand Timor-Leste Togo Tonga Trinidad and Tobago

Tunisia Turkey

Turkmenistan Uganda Ukraine United Arab Emirates

United Kingdom

United States Uruguay Uzbekistan

Vanuatu Venezuela, República

Vietnam Yemen, Republic of

Zambia Zimbabwe

17

Bolivariana de

Section 6.4 World Bank Today

After the failure to achieve the primary gold of poverty alleviation World Bank therefore it has

been reformed. Mr. Robert B. Zoellick is the eleventh President of the World Bank Group since

2007. The Bank organizes its operations on a regional basis. A Vice President heads each of six

regions which are Africa, East Asia and Pacific, South Asia, Europe and Central Asia, Middle

East and North Africa, and Latin America and the Caribbean and which are responsible for all

operations in the borrowing countries within that region. 89

The World Bank has some 10,000 staff who works at its headquarters in Washington and in

over 100 country offices worldwide.90 Since the World Bank began operating, it has been

carrying over 10,000 projects and provides a wide variety of analytical and advisory service to

meet the development needs of individual countries and the international community such as

Productive Safety Net (APL III) project in Ethiopia, Third Basic Education Quality

Improvement Project in Uruguay, and Framework for Green Growth Project in Mexico.91

Section VII: European Snake in tunnel

After the collapse of the Bretton Woods in 1971, most of the EEC countries agreed in 1972 to

maintain stable exchange rates by preventing exchange fluctuations of more than 2.25%92 as

know as the European currency snake.

In the 1970s, the ‘snake in the tunnel’ was the first challenge of European monetary cooperation

which aimed at limiting fluctuations between different European currencies. It was an attempt at

creating a single currency band for the European Economic Community (EEC), essentially

pegging all the EEC currencies to one another.93 The EC member states established the snake in

89 The World Bank, World Bank Management- Management at the Country level <http://go.worldbank.org/7W4TE188W1> at 2 November 2009.90 Ibid.91 Bretton Woods Project, above n 1.92 Icon Group International, Inc., Eec: Webster’s Facts and Phrases (revised ed, 2008). 93 Wikipedia, Snake in the tunnel, < http://en.wikipedia.org/wiki/Snake_in_the_tunnel> at 26 October 2009.

18

April 1972. Denmark, UK and Ireland had been accepted for EC membership to protect

themselves from the currency situations. The arrangement of EEC were patterned after Bretton

Wood were authorized to retain controls on capital movements and consistent with their

obligations to the IMF and the OECD.94

In the late 1960s and early 1970s, Europe was seriously weakened by the currency turmoil. The

joint effect of the deflation of the French franc, the upward revaluation of the German mark and

the collapse of the Bretton Woods International Monetary System destabilised European

markets. Furthermore, exchange rates between the currencies of the Member States had to be

fixed before a common market could be created. In 18 December 1971, The Smithsonian

Agreement was signed in Washington on behalf of German and France. France came around to

support the idea of Karl Schiller, the German minister for Finance and Economic Affair, to

resolve the crisis of finance stability. The new parities between dollar and European currencies

were set which also has known as the currency tunnel.95 However, in 1977, the president of the

European commission, Roy Jenkins put forward a new proposal for EMU after the EMU

couldn’t try to manage the currency stability properly with the participation of all Member

states’ currencies except the British pound which joined in 1990 and only stayed for two years.96

Section VIII: European Monetary System (EMS)

European Monetary System (EMS) was an arrangement established in 1979 under the Jenkins

European Commission where most nations of the European Economic Community (EEC) linked

their currencies to prevent large fluctuations relative to one another.97 EMS was performed very

well and more flexible than monetary under Bretton Wood system. For instance, The maximum

margin tolerated between two currencies in the system remained 2.25%, just as in the snake (6%

for the weaker currencies), but a currency's exchange rate fluctuations were no longer calculated

in relation to each of the other currencies in the system, but in relation to the European currency

unit. 98

94 Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond (1st ed, 2007) 247-8.95 Étienne Deschamps, The European currency snake’ European Navigator (Centre Virtuel de la Connaissance sur l'Europe trans, 2006 ed) <http://www.ena.lu/european-currency-snake-020100278.html>.96 European Commision, Phase 2: the European Monetary System <http://ec.europa.eu/economy_finance/the_euro/road_to_emu9381_en.htm> at 2 November 2009.97 Wikipedia, European Monetary System <http://en.wikipedia.org/wiki/European_Monetary_System> at 30 October 2009.98 Nicolas Moussis, Access to European Union (18th ed, 2009) 120, 131.

19

In general, the EMS confirmed the meaning of the cooperative discipline framework which it

helped to establish. By obliging the countries, which were party to it, to comply with an explicit

exchange rate discipline, it made a decisive contribution in the fight against inflation.99 The

famous Bundesbank, German famous bank, was unable to guarantee of the discipline under

EMS. However, these discipline present good results until the end of the '80s, but, since 1990,

two important phenomena started eroding this discipline within the EMS: the complete

liberalisation of capital movements within the Community, which reinforced the speculative

capacity of financial intermediaries; and the cost of German reunification, which had resulted in

an increasing budgetary deficit in Germany.100 Without the stability of currency, none of

monetary system cooperation and the end of Bretton Wood system, and with all these lessons,

EMS members gained ability to organize the EMS and it’s even more useful but only needed

better mechanism.101

According to the EMS Agreement, participating central banks are entitled to hold only working

balances in other participating currencies, and these limits can only be exceeded with the

consent of the central bank concerned. This provision, however, has been applied flexibly. In

particular, the Deutsche Bundesbank, the issuer of the main EMS intervention currency, has

consented to other central banks holding substantial amounts of deutsche mark and, on occasion,

has encouraged them to acquire deutsche mark when market conditions made this appropriate.

During periods of strength of its currency, the Deutsche Bundesbank has at times been reluctant

to see large injections of its currency into the market as this may have been in conflict with its

own domestic monetary targets.102

Furthermore, at the beginning of 1999; the same EU members adopted a single currency, the

Euro, for foreign exchange and electronic payments. By then, European Union created a

common economic policy to help nations reduce debt and made a strong attempt at taming

inflation. In 2001, EU established the budget-deficit ceilings because of the growth of economic.

And the Euro coins and notes began circulating in 2002. The ECU was used as a unit of

accounting to determine exchange rates among the national currencies. In 2003, economic 99 Ibid.100 Ibid 132.101 Ibid 132-3.102 Ungerer, above n 2.

20

downturns, France and Germany stayed in violation of the ceilings, temporarily suspended the

pact but later in 2004 the EU high court annulled the finance ministers’ decision. According to

the ECU, Denmark, Great Britain, and Sweden did not adopt the Euro. The most notable is

Britain, which continues to regard itself as more or less separate from Europe. In all three

nations there have been strong public concerns that dropping their respective national currencies

would give up too much independence. Danish voters rejected the Euro in a referendum in 2000.

The vote strengthened opposition to the Euro in Britain and Sweden. Of the 12 EU members

admitted since 2004, Slovenia, Malta, and Cyprus have adopted the Euro.103

Conclusion

By mid 1900s, the U.S. financial authorities had established the institutions, and procedures to

regulate the international monetary system of setting international standard to all nations to strict

the used of gold standard determining the value to a US currency. The Bretton Woods

agreement made the U.S currency to be better than any currency in the world and also give the

opportunities for deciding the direction and policy of the world’s economy. U.S. is also only

country that can has the balance of trade deficit by do not have to devaluation their currency.

The system was very successful in the short time because all nations reserve the U.S. dollars for

their country but after the distrust in the U.S. currency they are selling the currency and

exchange to gold or other currency. The system of Bretton Woods with its fixed exchange rates

does not exist anymore today. However, the Bretton Woods system and the International

Monetary System performed very well in the short period of time but after World War II, the

whole system had collapsed. After the Bretton Woods collapsed, the floating exchange rate

system operated instead of the fixed exchange rate.

The major points of the collapse of the Bretton Woods system were the connected between

problems. The way that U.S. manages by using macroeconomic policies is also the major

problem to create the breakdown of the system. The recession from the capital expense of doing

Vietnam War and many nations begin to recognise the emerging balance of payments and gold

market pattern specially the price of gold and dollar liabilities. The failed to responding a real

dollars depreciation to stop the persistent U.S. balance of payments and to develop a mechanism

103 Columbia Electronic Encyclopedia, European Monetary System <http://www.infoplease.com/ce6/history/A0817895.html> at 2007.

21

for providing reserves that were not fix to the U.S. dollar and ultimately linked to a U.S. balance

of payments deficit. As the result in distrust of U.S. currency, many countries sell dollars to the

Federal Reserve for gold therefore; in this case, it likely to make U.S. currency reduce when

compare with pure gold. But, the government at that time does not want to devaluation,

therefore they are continue running imbalanced a deficit then it cause the value of U.S currency

continuously drop. Therefore, in 1971s the U.S. announced the revoke of exchanging the

currency into pure gold and then the Bretton Woods had come to an end of its system.

Soon after the fail of Bretton Woods system, The European countries were agreed to maintain

stable exchange rates by preventing exchange fluctuations. They performed as a group to

compete with outside currencies including the dollar. The European Monetary System (EMS)

was established with the European Currency Unit (ECU) to launch as a bridge to help the lead

the ultimate goal of Economic and Monetary Union (EMU). The currency of Japan and most of

European nations were floating against dollar and shortly it became to be a new system in

international monetary relations.104

The roles of IMF and World Bank today are similar to the previous roles under Bretton Wood

system. IMF continues to loan foreign currencies to members for their shortage of money, when

a rapid tightening of monetary or fiscal policy would hurt domestic employment. The World

Bank is also remains as the primary financier of development projects in the Third World, with

offices located around 100 countries across the world.

The IMS under Bretton Woods system no longer exists. However, the IMF and the World Bank

remain to help the developing countries. With this fact in mind it is easy to understand how

various countries have advanced their living standards, policies, and economies.

Assessment of the system for contemporary for financial global environment

The financial global environment is about the choices we make and the way we carry them out.

Many scholars and politicians have called for strengthening the global environmental financial

system by transforming IMF and World Bank into a more influential global environmental

organization. In this paper, I examine how the Bretton Woods System has performed under IMF

104 Krugman and Obstfeld, above n 3, 509.

22

and World Bank in terms of delivering results according to its mandate as the leading institution

for global financial theory and analyse the implications for reform of the system as demanded

by the US and EU. I have identified a set of core structural factors that resulted from a historical

compromise between the performance of IMF and World Bank at the time of Bretton Woods.

Yet, their impacts on effectiveness, efficiency, and equity are critical. I have sought to

understand the compromises of the International monetary system and have learnt that the

system was performed in the short period of time.

However, it is clear that the world economic order created by the international monetary

institutions such as the IMF and World Bank is sufficient to manage world’s economy. The

Bretton Woods system will be better if we learn from our lesson in the past and adapt or

improve that theory to be relate to presently. According to the experience, it shows that national

governments would not be willing to maintain both free trade and fixed exchange rates at the

price within single economy.105 In the future, the need to improve of the Bretton Woods system

should combine international cooperation between developing and developed nations. The

monetary institutions such as IMF and World Bank should improve to support more in

developing countries for protecting inflation from economic circumstance. The fixed economy

made it difficult for countries to manage simultaneous internal and external balance without

discrete exchange rate adjustment. Consequently, the policy-maker have to learn from the past,

what the problem, why is it failed, what should be done to improve and then manage to adapt

the policies to ensure that the next Bretton Woods system will be achieve or successful in the

long-term goal and should not fix the currency within single economy. Otherwise, the new

Bretton Woods will come to an end again.

Word: 6,576

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