The Essence of the Bretton Woods Monetary System
Development of new, more efficient international monetary system began in April 1943. At the international conference in Bretton Woods in 1944, leading Western countries agreed on the main principles of the Bretton-Woods monetary system. The International Monetary Fund (IMF) was established, the "duty" of which is to ensure the proper functioning of the system and compliance with the principles of the general international agreement.
Basic principles of currency relations management according to the Bretton Woods monetary system are:
1) The Bretton Woods system was based on the gold-exchange standard, the foundation of which was gold and two currencies - the U.S. dollar and the pound sterling, which were considered as the equivalent to gold in international payments and can function as a reserve currency;
2) the establishment of fixed parities agreed under the IMF on the basis of which the currencies were compared and exchanged.
To provide the correspondence between the real exchange rate of the currency and the announced parity, each country could:
• or guarantee the convertibility of their currencies into gold at the official parity (this option was selected by the U.S., by establishing in 1945 the next parity: $ 35 for an ounce of gold);
• or maintain market rate of its currency in relation to other ones within the oscillation maximum of 1% of its parity (this option was selected by other countries).
Exchange rates fluctuated significantly from their parities, as they were under the state and interstate influence. The IMF controlled the mechanism of international payments, resorting to currency interventions, mainly in U.S. dollars. At the fundamental disequilibrium, by agreement with the IMF, the devaluation and revaluation of currencies of the developed countries were carried out.
3) convertibility of currencies, freedom and versatility of payments on current account transactions.
The Bretton Woods system functioned for nearly 30 years. It was the time of economic recovery in Western Europe and Japan, the "economic miracle" and the relatively moderate inflation in the industrial countries.
However, the Bretton Woods monetary system satisfied the needs of the international trade and capital flows less and less due to the growth of the world economy, the competition increasing and the inflation increasing, a sharp increase in the volume of financial transactions not related to a specific trade transactions, as well as in connection with the crisis of the key currency of the system - the U.S. dollar.
The fact is that the inequalities of currencies had place within the Bretton Woods system. The U.S. dollar took a privileged position. This allowed the U.S. to cover the current account deficit is largely due to short-term liabilities of U.S. banks to foreign government agencies and individuals. U.S. became a debtor. Investment balance (the capital flow balance) also was not in favor of the U.S.. There was an outflow of capital, and as a result, a negative balance of payments was formed. Chronic deficit of the balance of payments had meant that the amount of dollars abroad far exceeded the U.S. gold reserve. There was a lack of confidence in the dollar and the desire to exchange dollars for gold. U.S. began to lose its dominant position in the global production and international trade. The role of EU, Japan and other countries grew up due to the positive balance of payments. In this situation, to overcome U.S. current account deficit would reduce international liquidity, which would impede the international payments. U.S. faced a choice: to incur large costs or change all the rules of the currency system. U.S. chose to change the rules by breaking the connection between dollar and gold in 1968 and then by implementing of floating rate of the dollar in 1971. Furthermore, the principles of the Bretton Woods system undermined the development of the Euromarkets and Eurodollar markets, on which a lot of dollars was circulated, which, in turn, almost fell out of the regime of restrictions imposed by the national currency authorities and the IMF. All this factors created a favorable environment for currency speculations. In such conditions, the system of fixed exchange rates could not function effectively enough. Afterwards, it was started the transition to the new monetary system, known as "the Jamaica one " as the name of the country where the basic principles of the system were created.