Bretton Woods & the IMF

Plan
1. Bretton Woods a. Previous system b. Conference of Bretton Woods c. End of Bretton Woods

2. The International Monetary Fund (IMF) a. Creation and role b. Functioning c. Criticisms CONCLUSION

1. Bretton Woods

Previous system
Gold Standard
All currencies were to be

converted to a certain mass of gold Fixed exchange rate Disappeared and reappeared with different wars & crises Finally stopped in the 30s

The Conference of Bretton Woods

Context
July of 1944

Last months of WW2

Need to set up a new

financial system 44 nations Supremacy of the US that held 2/3 of the gold reserves

Harry Dexter White VS John Maynard Keynes

Keynes proposition
Establishment of a world reserve currency called

BANCOR Administrated by a central bank, only institution to be able to create money In case of balance of payments imbalances, both debtors and creditors have to change their policies
Creditors

import from deficit countries so that they can reach a trade equilibrium

Harry Dexter White won!

US overwhelming economic power

led to the victory of Whites proposition

The American interests prevailed at

that time

As a mainly creditor country, the US could not agree with Keynes proposition

The Bretton Woods system

Establishment of the Gold Exchange Standard

All currencies were directly convertible into the most stable currency, the USD, only currency to be directly convertible into gold $35 for 1 ounce of gold

Pegged rate regime a fixed exchange rate was to be

maintained within 1% of parity (the band)

Avoid competitive devaluations that led to a deflationary spiral with bad consequences in the 30s

Control over exchange rates and balance of payments to be

done by the IMF Creation of 2 major institutions: IMF and World Bank

Crises met by the system

Triffin dilemma

The US had to respect a strict monetary discipline with the dollar, as a reserve currency But with the rise of free trade, they also had to supply the world with currencies to fulfil the increasing demand of dollars

US gold reserves grew slowly in comparison

with expenditures (wars, Plan Marshall refunds not sufficient to reduce the imbalance) Confidence on USD as a reserve currency eroded Efforts were made under Kennedy, but not sufficient

End of the system

Nixon Shock Crisis of the 70s

Nixon decided the end of convertibility between USD and gold in 1971 + devaluation Led by high inflation and European pressure for currency supply 2nd devaluation + oil crisis in 1973

Snake in the tunnel 1st attempt to

peg European currencies to one another ( 2,25%), but failed Jamaica Agreement in 1976 demonetization of gold officialised

2. The International Monetary Fund

Creation and role

Created during the Bretton Woods

conference
Roles

Respect of the gold exchange standard and the BW principles (until its end) Avoid devaluations and revaluations (unless it is necessary, then IMF decides) Stimulate international trade Help countries with financial difficulties Reduce poverty

Functioning
Each member has to pay a quota share commensurate with

its economic power

The voting power of each member also corresponds to this

share (the US having the majority and the only country possessing a veto power)
When a member is granted a loan, it has to respect a

structural adjustment program

Criticisms
Considered harmful to developing

countries structural adjustment program and Washington Consensus Support of dictatorships Directors from rich countries only (protests from emerging countries) Voting power held by the rich so IMF ruled by them Inefficient methods to analyse economic performances 2008 crisis not anticipated

CONCLUSION
And now?
2008 crisis tackled the question of a

new financial system

Maybe a new Bretton Woods as rose by N.

Sarkozy and G. Brown

Reforming the IMF?

New governance (more power to emerging countries and protection of the poorest) Better methods to analyse economic evolutions