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Description

The Bretton Woods Agreements of 1944 was an international treaty establishing a gold exchange standard for international currency.

Discussion

For three weeks in July 1944 the United Nations Monetary and Financial Conference took place at Bretton Woods in New Hampshire, United States. The aim was to regulate the global monetary matters following World War II. As such, it was attended mostly by the allied nations of World War II.

The United States dollar was pegged to the price of gold and international currencies were pegged to the United States dollar by fixed exchange rates. Moreover, currencies were to be freely interchangeable between one another.

what Bretton Woods really set up was what used to be called a "gold,exchange" standard. Every other country in the scheme undertook simply to keep its own currency unit convertible into dollars. The United States alone undertook (on the demand of foreign central banks) to keep its own currency unit directly convertible into gold. - Henry Hazlitt

One benefit of a gold exchange currency is the limitation upon banks to expand credit excessively. On 15 August 1971 the United States President Richard Nixon announced that from that day forward no United States dollar could legally be redeemed for gold.

The Agreements also established two new global institutions:

  • the International Bank for Reconstruction and Development (IBRD), which eventually become part of the World Bank, and
  • the International Monetary Fund (IMF), which became operational in 1947.

The purpose of the IBRD was to help rebuild and develop member states by making it easier to invest money in projects in those countries.

The purpose of the IMF was "to promote international monetary cooperation". To achieve such cooperation, the IMF required all member states to make a certain amount of their currencies available to be borrowed to other member states who were experiencing "temporary balance of payment difficulties."

However, the loaning states had little say, neither in how much they were required to put up for loan, nor in how long the loan periods were to be.

Substantive

Establishing the gold exchange for currencies​

(b) Articles of Agreement of the International Monetary Fund

ARTICLE IV. PAR VALUES OF CURRENCIES

SECTION 1. EXPRESSION OF PAR VALUES

(a) The par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944. (b) All computations relating to currencies of members for the purpose of applying the provisions of this Agreement shall be on the basis of their par values.

SECTION 2. GOLD PURCHASES BASED ON PAR VALUES

The Fund shall prescribe a margin above and below par value for transactions in gold by members, and no member shall buy gold at a price above par value plus the prescribed margin, or sell gold at a price below par value minus the prescribed margin.

SECTION 3. FOREIGN EXCHANGE DEALINGS BASED ON PARITY

The maximum and the minimum rates for exchange transactions between the currencies of members taking place within their territories shall not differ from parity (i) in the case of spot exchange transactions, by more than one percent; and (ii) in the case of other exchange transactions, by a margin which exceeds the margin for spot exchange transactions by more than the Fund considers reasonable.

SECTION 4. OBLIGATIONS REGARDING EXCHANGE STABILITY

(a) Each member undertakes to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations. (b) Each member undertakes, through appropriate measures consistent with this Agreement, to permit within its territories exchange transactions between its currency and the currencies of other members only within the limits prescribed under Section 3 of this Article. A member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold within the limits prescribed by the Fund under Section 2 of this Article shall be deemed to be fulfilling this undertaking. ...

ARTICLE VIII. GENERAL OBLIGATIONS OF MEMBERS

SECTION 1. INTRODUCTION

In addition to the obligations assumed under other articles of this Agreement, each member undertakes the obligations set out in this Article.

SECTION 2. AVOIDANCE OF RESTRICTIONS ON CURRENT PAYMENTS

(a) Subject to the provisions of Article VII, Section 3 (b), and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions. (b) Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member. In addition, members may, by mutual accord, co-operate in measures for the purpose of making the exchange control regulations of either member more effective, provided that such measures and regulations are consistent with this Agreement. ...

The creation of the (the World Bank's lending division)​

(a) Articles of Agreement of the International Bank for Reconstruction and Development

ARTICLE I. PURPOSES

The purposes of the Bank are:

(i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries. (ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources. (iii) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories. (iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first. (v) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.

The creation of the IMF​

(b) Articles of Agreement of the International Monetary Fund

ARTICLE I. PURPOSES

The purposes of the International Monetary Fund are:

(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems. (ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. (iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation. (iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. (v) To give confidence to members by making the Fund's resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. (vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium. in the international balances of payments of members. The Fund shall be guided in all its decisions by the purposes set forth in this Article ...

ARTICLE III. QUOTAS AND SUBSCRIPTIONS

SECTION 1. QUOTAS

Each member shall be assigned a quota. The quotas of the members represented at the United Nations Monetary and Financial conference which accept membership before thedate specified in article XX, Section 2 (e), shall be those set forth in Schedule A. The quotas of other members shall be determined by the Fund ...

ARTICLE VIII. GENERAL OBLIGATIONS OF MEMBERS

SECTION 4. CONVERTIBILITY OF FOREIGN HELD BALANCES

(a) Each member shall buy balances of its currency held by another member if the latter, in requesting the purchase, represents (i) that the balances to be bought have been recently acquired as a result of current transactions; or (ii) that their conversion is needed for making payments for current transactions. The buying member shall have the option to pay either in the currency of the member making the request or in gold. (b) The obligation in (a) above shall not apply (i) when the convertibility of the balances has been restricted consistently with Section 2 of this Article, or Article VI, Section 3; or (ii) when the balances have accumulated as a result of transactions effected before the removal by a member of restrictions maintained or imposed under Article XIV, Section 2; or (iii) when the balances have been acquired contrary to the exchange regulations of the member which is asked to buy them; or (iv) when the currency of the member requesting the purchase has been declared scarce under Article VII, Section 3 (a); or (v) when the member requested to make the purchase is for any reason not entitled to buy currencies of other members from the Fund for its own currency.

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