The Bretton Woods Agreement is a monumental moment in the world of monetary and international trade. The agreement resulted in the Bretton Woods System, a system in which the US dollar currency would use the gold standard while the value of other currencies would be linked to the value of the US dollar.
The agreement produced by the event marked the birth of superpower institutions in the world of monetary and international trade, as well as a new chapter in the exchange rate system between countries. So, what are the ins and outs of the agreement?
History of the Bretton Woods Agreement
The Bretton Woods Agreement was signed by 44 countries in 1944, exactly a year before Indonesia declared its independence. This agreement is the result of a three-week conference attended by 730 delegates from 44 countries in formulating a trading system between countries to be more efficient.
The agreement was made in a small and peaceful village in the State of New Hampshire, United States called Bretton Woods.
In fact, the objectives and framework of the discussions discussed at the meeting had been prepared years in advance. The formulators of the discussion were renowned economist John Maynard Keynes and US Treasury Chief International Economist Harry Dexter White.
There are two main purposes of this agreement.
- Encouraging the reduction of tariffs and trade barriers between countries.
- Creating a global economic framework that is less conflicted
The Bretton Woods system
In order to realize the agreed objectives, the Bretton Woods Agreement also gave birth to a new economic system called the Bretton Woods System.
This system marked the end of the era of mercantilism which was accused of causing many wars and colonialism, including the second world war which had just ended when the meeting was held. The trick is to replace the system of foreign exchange reserves in the country’s wealth which was originally collected in the form of gold and valuable assets to be in the form of international currency.
Keynes originally proposed a new currency called the Bancor to become an international medium of exchange. Bancor is planned to be issued by a clearinghouse called Clearing Union based on gold as the underlying.
However, White instead took advantage of this momentum to establish the United States as a superpower by making the US dollar an international currency, so bancor and Clearing Union were not created.
Instead, the dollar-printing Federal Reserve maintains gold reserves for every dollar it prints. At that time, the pegged price was US$35 for each ounce of gold, safely 1 ounce was equivalent to 28.3495 grams. This system was not fully operational until 1958.
In addition, another point of the Bretton Woods system is currency pegging. Namely the policy to set the exchange rate between countries at one level with a tolerance of only 1% of the specified exchange rate.
In fact, this mechanism is useful for reducing exchange rate volatility, so that international trade becomes more stable. The implication is that each member country is required to monitor its exchange rate by maintaining the availability of US dollars as a representation of foreign exchange reserves.
Of course, this tactic succeeded in creating stability in international trade, as well as the development of lending by the Bretton Woods institution. So, what is the Bretton Woods institution?
Getting to Know the Bretton Woods Institution
There are two international institutions that were born in the agreement, namely the World Bank and the International Monetary Funds (IMF).
Both were formally introduced to the public in December 1945 with two different purposes. Then, in the 1990s, the WTO was also born which was also conceptualized in the Bretton Woods agreement.
Initially, the World Bank was called the International Bank for Reconstruction and Development. His original task was to regulate the availability of funds to help the country recover from the second world war.
However, the role of the World Bank has expanded beyond just helping the monetary recovery of countries in the post-war world. Currently, on its official website, the World Bank says its mission is to eradicate poverty and promote equity.
The World Bank now consists of 189 countries with a total of 12,000 projects spread all over the world.
International Monetary Funds
This institution was created to monitor exchange rates and identify countries that need an injection of funds and monetary support.
The IMF now has 190 countries with 24 countries acting as executive directors.
World Trade Organization
In addition to the two institutions that were born at the same time as the Bretton Woods Agreement, this agreement also defines another institution that plays a role in international trade.
The institution was originally called the International Trade Organization (ITO). However, the concept was dormant until 1995.
This institution claims to be the only international organization that manages trade between countries. Now the WTO has 16 members with a trade representation of 98% of the total world trade.
The Collapse of the Bretton Woods System
Although full of the promises of heaven, Keynes and White’s system was short-lived.
In 1971, after running for 13 years, the world began to suspect that the availability of gold owned by the Fed was no longer qualified to be the underlying US dollar in circulation.
President Richard M Nixon also devalued the US Dollar against gold, then shortly afterward suspended the conversion of dollars into gold. It didn’t take long, in 1973 this system was declared collapsed.
In effect, countries are free to choose any setting for their currency except to peg it at the price of gold. Since then, we have become acquainted with the various systems of exchange for the country’s currency, namely the fixed exchange rate, floating exchange rate, or a mixture of both.
Even though the system collapsed, this agreement still left the institutions that have triumphed to this day. Also, the new economic system that was born afterward also learned a lot from the failure of the system as a result of the Bretton Woods Agreement.
In fact, the collapse of the Bretton Woods Agreement also opened public access to gold investment. Because gold began to be sold freely in the commodity market after Nixon released the US dollar from the gold standard.