Bretton Woods System

1. Introduction

A need for stable system is desired by all economies in era of globalization and rapid change in economic environment. Post World War I many economies were in trouble and there aroused a need to develop a system which could provide balance and sustainability to international trade and help the economies to revive their status and develop post war period as described by (Cohen, 2000)

After World War I, economies worked on reviving the gold standard for international trade but it did not survive the economic depression of 1930. Many conferences to deal with economic and world problems caused by the Great Depression in 1930 were held, but failed. (The Economist, November 25th 2000, p. 112). To resolve this common requirement of almost all economies of the world, a conference was held at Bretton Woods, USA in 1944. As USA was most dominant economy after World War I, it played a dominant role in the conference. The two key persons who presented their views were Harry Dexter White of the U.S. Treasury and John Maynard Keynes of Britain (Kenen & Peter, 1994). The main purpose of this conference was to design a new international monetary system and a supervisory institution to monitor all actions

With its name derived from Bretton Woods, it was first of its kind of conference held post war period and led to creation of International Monetary Fund and World Bank. (Cohen, 2000)

2. What is Bretton Woods System?

The American minister of state in the U.S. treasury, Harry Dexter White, and the British economist John Maynard Keynes presented their plans for system of Bretton Woods (Moggeridge, 1944, p. 103)

The Economist (November 25th 2000, p. 112) states that the Bretton Woods system agreed on implementing a system of fixed exchange rates with the U.S. dollar as the key currency as it was the only dominant currency in post war period. The United States defined the value of its dollar in terms of gold, so that one ounce of gold was equal to $ 35. All other economies had to define the value of their currency value as per the “par value system” in terms of U.S. dollars or gold.

This resolved the two extreme issues of having a fixed exchange rate or having fully floating exchange rate. The system implemented a pegged rate system for the participating economies

Under the Bretton Woods system, central banks of economies were given the task of maintaining fixed exchange rates between their currencies and the dollar. They did this by intervening in foreign exchange markets. If a country's currency was too high relative to the dollar, its central bank would sell its currency in exchange for dollars, driving down the value of its currency. Conversely, if the value of a country's money was too low, the country would buy its own currency, thereby driving up the price. (The Economist, November 25th 2000,