Bretton Woods and the International Monetary Fund,...
As World War II drew to a close in 1944, the Allied Powers met at Bretton Woods, New Hampshire, in order to create a new postwar international monetary system.The Bretton Woods Agreement established a US dollar-based international monetary system and provided for two new institutions: the International Monetary Fund and the World Bank.The International Monetary Fund (IMF)aids countries with balance of payments and exchange rate problems.The International Bank for Reconstruction and Development (World Bank)helped fund postwar reconstruction and since then has supported general economic development.Global Finance in Practice 3.1 provides some insight into the debates at Bretton Woods.
The IMF was the key institution in the new international monetary system, and it has remained so to the present.The IMF was established to render temporary assistance to member countries trying to defend their currencies against cyclical, seasonal, or random occurrences.It also assists countries having structural trade problems if they promise to take adequate steps to correct their problems.If persistent deficits occur, however, the IMF cannot save a country from eventual devaluation.In recent years, it has attempted to help countries facing financial crises.It has provided massive loans as well as advice to Russia and other former Russian republics, Brazil, Indonesia, and Republic of Korea, to name but a few.
Under the original provisions of the Bretton Woods Agreement, all countries fixed the value of their currencies in terms of gold but were not required to exchange their currencies for gold.Only the dollar remained convertible into gold (at $35 per ounce).Therefore, each country established its exchange rate vis-a-vis the dollar, and then calculated the gold par value of its currency to create the desired dollar exchange rate.Participating countries agreed to try to maintain the value of their currencies within l％ (later expanded to 2.25％)of par by buying or selling foreign exchange or gold as needed.Devaluation was not to be used as a competitive trade policy, but if a currency became too weak to defend, a devaluation of up to 10％ was allowed without formal approval by the IMF.Larger devaluations required IMF approval.This became known as the gold-exchange standard.
The Special Drawing Right (SDR)is an international reserve asset created by the IMF to supplement existing foreign exchange reserves.It serves as a unit of account for the IMF and other international and regional organizations, and is also the base against which some countries peg the exchange rate for their currencies.
Defined initially in terms of a fixed quantity of gold, the SDR has been redefined several times.It is currently the weighted average of four major currencies: the US dollar, the euro, the Japanese yen, and the British pound.The weights are updated every five years by the IMF.Individual countries hold SDRs in the form of deposits in the IMF.These holdings are part of each country’s international monetary reserves, along with official holdings of gold, foreign exchange, and its reserve position at the IMF.Members may settle transactions among themselves by transferring SDRs.