Bretton Woods Agreement

(extract from Wikipedia; just background)

The Bretton Woods system of international monetary management established the rules for
commercial and financial relations among the world's major industrial states. The Bretton Woods
system was the first example of a fully negotiated monetary order intended to govern monetary
relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730
delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods,
New Hampshire for the United Nations Monetary and Financial Conference. The delegates
deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July
1944. The conference was held from 1 July to 22 July 1944, when the agreements were signed to
set up the International Bank for Reconstruction and Development, the General Agreement on
Tariffs and Trade (GATT), and the International Monetary Fund (IMF).

The Bretton Woods Conference took place in July of 1944, but did not become operative until
1959, when European currency became convertible. Under this system, the International
Monetary Fund (IMF) and the International Bank for Reconstruction and Development were
established. The IMF was developed as a permanent international body. The summary of
agreements from July 22, 1944 states, "The nations should consult and agree on international
monetary changes which affect each other. They should outlaw practices which are agreed to be
harmful to world prosperity, and they should assist each other to overcome short-term exchange
difficulties." The International Bank was created to speed up post-war reconstruction, to aid
political stability, and to foster peace. This was to be fulfilled through the establishment of
programs for reconstruction and development.

Setting up a system of rules, institutions, and procedures to regulate the international monetary
system, the planners at Bretton Woods established the International Bank for Reconstruction and
Development (IBRD) (now one of five institutions in the World Bank Group) and the
International Monetary Fund (IMF). These organizations became operational in 1946 after a
sufficient number of countries had ratified the agreement.

The chief features of the Bretton Woods system were an obligation for each country to adopt a
monetary policy that maintained the exchange rate of its currency within a fixed value—plus or
minus one percent—in terms of gold; and the ability of the IMF to bridge temporary imbalances
of payments. In the face of increasing strain, the system collapsed in 1971, following the United
States' suspension of convertibility from dollars to gold.

The seminal idea behind the Bretton Woods Conference was the notion of open markets. In
Henry Morgenthau's farewell remarks at the conference, he stated that the establishment of the
International Monetary Fund and the World Bank marked the end of economic nationalism. This
meant countries would maintain their national interest, but trade blocks and economic spheres of

influence would no longer be their means. The second idea behind the Bretton Woods
Conference was joint management of the Western political-economic order. Meaning that the
foremost industrial democratic nations must lower barriers to trade and the movement of capital,
in addition to their responsibility to govern the system.

The need for postwar Western economic order was resolved with the agreements made on
monetary order and open system of trade at the 1944 Bretton Woods Conference which allowed
for the synthesis of Britain's desire for full employment and economic stability and the United
States' desire for free trade.

The Conference also proposed the creation of an International Trade Organization (ITO) to
establish rules and regulations for international trade. The ITO would have complemented the
other two Bretton Woods proposed international bodies: the IMF and the World Bank.

The ITO charter was agreed at the U.N. Conference on Trade and Employment (held in Havana,
Cuba in March of 1948), but was not ratified by the U.S. Senate. As a result, the ITO never came
into existence.

However, in 1995, the Uruguay Round of GATT negotiations established of the World Trade
Organisation (WTO) as the replacement body for GATT. The GATT principles and agreements
were adopted by the WTO, which was charged with administering and extending them. It has
been argued that the WTO functions, today, as the ITO would have functioned, had it been
created.