Background
Bretton woods system came into being after the World War II crisis. As in the Bretton woods
conference of July 1944, it was decided that there must be some kind of system that maintain the
instructions and the rules of a liberal world economy. That conference set up the International monetary
fund, World Bank and the international trade organization. These organizations were set up so as to
manage the post-war monetary arrangements that the gold was being replaced by the US dollar as
the medium of international exchange.
conference of July 1944, it was decided that there must be some kind of system that maintain the
instructions and the rules of a liberal world economy. That conference set up the International monetary
fund, World Bank and the international trade organization. These organizations were set up so as to
manage the post-war monetary arrangements that the gold was being replaced by the US dollar as
the medium of international exchange.
World War I was the starting point or turning point for the evolution of the political economy of the
world because the impact of this war was very clear on the major countries of the world. Before the 19
14 gold was the standard currency and Britain was the manager of the world economy, and Britain was
not only dominating the monetary of the world but also establishing the rules of the game.
Furthermore, in 1914 when World War I took place, the standard of the gold was being crashed and
each of the countries direction started to take independent steps without considering whether they were
in the right direction or not and that resulted in negatively impacting the system. The standard of gold
was fixed rate but in the later years due to the floating rate the values of the currencies was fluctuating
due to the war uncertainties. Post-world war I steps were taken to recover the standard of the gold but that was not easy because the post-war days were the days of inflation whose impact was being seen in whole of the world.
Bretton Woods System
Due to the difficulties faced in the restoration after World War I, now American and British
officials got tempted at the start of World War II for rebuilding the monetary system. Now they thought
it was very important to form new rules and national policies to aid the facilitation of common goals.
Hence they formed the international monetary fund and the World Bank for the sake of properly
running the international financial system. Both of the financial institutes were started in the
World War II after the United Nation Monetary and Financial Conference was conducted at the Bretton
Woods in New Hampshire in 1944 with the involvement of 44 countries was finally concerned
for the formulation of the regulatory international financial system.
As we know IMF was created for the sake of post-war monetary management and the written
constitution and that was later known as the Bretton Woods system.
The Bretton Woods system basically was very much helpful in the elimination of the strict codes of
conduct or you may say it removed the international trade barriers that were causing harm or that
were restricting international trade. Furthermore, Bretton Woods enabled the countries in
financial crises to go to the IMF and the World Bank which would provide credit to the countries facing
the crises situation or any other form of economic disaster. The main objective of the Bretton Wood
system was to face the external barriers put on the national economies by the gold that was disastrous
providing during the war periods. There was a need for flexibility that could support providing policies
that can avoid devaluations.
Elimination of Bretton Wood System
At earlier 1960s, the fixed value of the US dollar against the gold in consideration of the Bretton Woods
system of fixed exchange rates was overvalued. Considerable growth of the spending in the domestic
country on President Lyndon’s Great Society programs and growth in military expenditure caused by
the Vietnam War slowly worsened the overvaluation of dollars.
Bretton Woods’s system gets to an end between 1968 and 1973. In 1971, the President of the the United
States declared the suspension of the dollar conversion into gold for the short term. Although the dollar
was struggling in the1960s within the parity being created at Bretton Woods, this crisis caused the end
of system. And the effort for the revival of fixed e rates also failed; hence the currencies of the major
countries started to float against each other in 1973.
From the breakdown of the Bretton Woods system, the members of the IMF were free to choose form
any of exchange arrangement but with the exception of fixing their own currency against gold which
means they have to leave their currency freely floating, but fix it against the other c basket of currencies
which will allow them the adoption of another country’s currency, hence they can participate in the
bloc of currency, or they can also form a monetary union.
Oil shocks
During the breakdown of the Bretton Woods system, everyone was fearful that the era of growth
would end now. But what happened was really shocking because the floating exchange rates were
relatively smooth. Because of the flexible exchange, it became easier for the economies to adjust the
expensive oil when the price was increasing in 1973. The more important thing that occurred was
that floating rates adjusted the external shocks that have ever occurred in history.
As we discussed the oil price shocks in 1970, what IMF did during these shocks is also considerable.
The IMF responded to these oil price shocks through lending instruments, like it helped the oil
importers in dealing with the inflation and the current account deficits in the situation of the higher oil prices and it helped in the following ways.
Helping the poor countries
Since the mid-1970, IMF helped many of the world’s poorest countries by giving them finance at the
lower rates that were known as the trust fund. Furthermore, in 1986, IMF came up with a new loan
program at lower rates that is called the structural adjustment facility and this program became
successful with the enhanced adjustment facility in 1987.