The international monetary system (IMS): a set of practices, rules and institutions aimed at organizing and monitoring monetary exchanges and financial flows between countries. This system of is generally defined as international payments and exchange rates between national currencies allows transactions between countries. Through history the world has known different monetary systems, one of the most popular among those systems was the Bretton Woods system.
The Brettonwoods International Monetary System:
The BrettonWoods agreements are pre-draft agreements that defined the broad outlines of the international financial system after World War II. Their main objective was to set up a world monetary organization and to promote the reconstruction and economic development of the countries affected by the war. They were signed on July 22, 1944 in BrettonWoods in the United States after three weeks of debates between 730 delegates representing all 44 allied nations in addition to a Soviet observer.
The two main protagonists of this conference were John Maynard Keynes, who headed the British delegation. and Harry Dexter White, Assistant to the United States.
Those meetings resulted in funding 2 institutions:
– The International Monetary Fund (IMF) : helps the countries which have problems of money and debt, by giving them advices on how to fix their internal policies and structures.
– The World Bank: a lending institution that lends money to poor countries for economic development, allies realised that poverty is a big motivating factor for conflict and violence, so helping countries end extreme poverty and create job opportunities would be beneficial for everyone.
The purpose behind creating these institutions was to create a system that avoids more world wars and great depressions in addition to helping the countries affected by the WWII to regain their economic stability.
Besides creating the IMF and the WB, they also decided that under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value.
The crisis of the international monetary system of BrettonWoods:
The stability of the system supposes that the American trade balance is not in deficit. However, it became so from the sixties, due to the drop in European imports. As the United States used the dollar to settle its deficit, the amount of dollars held abroad increased. At the same time, owing to the proliferation of international trade, many non-resident banks in the United States extended loans in dollars to non-residents of the United States. The multiplication of these “euro-dollars ” amplified the abundance of dollars which ultimately undermined confidence in this currency.
The Bretton Woods System came to an end in the early 1970s when President Richard M. Nixon announced that the U.S. would no longer exchange gold for U.S. currency.
If history has shown that several types of systems have been applied successively (fixed and floating exchange rate systems), it also underlines the role and place of international financial institutions (IFIs). The International Monetary Fund (IMF) and the World Bank (formerly the International Bank for Reconstruction and Development. IBRD) occupy a central position in the world monetary system. Their mission, defined by the Bretton Woods agreements (July 1944), was to provide stability to the world economy through fixed exchange controls and growth through loans to rebuild countries ruined by World War II.
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