EVOLUTION OF THE SYSTEM BRETTON WOODS - FINANZAS

FINANZAS

2. THE BRETON WOODS SYSTEM
AND THE INTERNATIONAL
MONETARY FUND
InJuly1944,representativesofforty-fourcountries
metinBrettonWoods,NewHampshire,todraft
andsigntheconstitutiveagreementofthe
InternationalMonetaryFund.
Aninternationalmonetarysystemwassoughtto
promoteemploymentandpricestability.
ItDefinessomeexchangeratesinrelationtothe
dollarandtheinvariablepriceofgoldindollars
perounce.

3. OBJECTIVES AND
STRUCTURE OF THE IMF
➢Disciplineismoreimportantinmonetarymatters.
➢Flexibleexchangerateswereacauseofinstability.
➢TwocharacteristicsoftheconstitutiveagreementoftheIMF:
▪First,themembersoftheIMFcontributedforeignexchangeandgoldtoformfinancialresources.
▪Second,theexchangeratesagainstthedollarwerefixed.

4. THE CONVERTIBILITY AND
EXPANSION OF PRIVATE
FINANCIAL FLOWS
•Theuseofnationalcurrenciesininternationaltrademakes
theglobaleconomyworkefficiently.
•ThefoundingagreementoftheIMFurgeditsmembersto
maketheirnationalcurrenciesconvertible.
•Aconvertiblecurrencyisonethatcanbefreelyexchanged
forothercurrencies.
•TheUSandCanadiandollarsbecameconvertiblein1945.
•Generalnon-convertibilitywouldmakeinternationaltrade
difficult.

5. SPECULATIVE CAPITAL
FLOWS AND CRISIS
✓Acountrywithapersistentcurrentaccountdeficitisinapositiontodevalue
itscurrency,whichcancauseacrisisinitsbalanceofpayments.
✓Acountrythathasanuncontrollablegrowthofitsmoneysupplycanpush
upthepricelevel.
✓AdeficitintheBritishtradebalanceinearly1964causedaperiodof
speculationagainstthepounduntilNovember1967whenthepoundwas
devalued.
✓FrancedevaluedthefrancandGermanytheGermanMarkin1969.

6. ANALYSIS OF ECONOMIC POLICY OPTIONS IN
THE BRETTON WOODS SYSTEM
•Considerfirsttheinternalequilibrium.
•Nationalinflationdepends,inthefirstplace,onthe
pressureofaggregatedemandontheeconomy,
notonfutureinflationexpectations.
•Theinternalbalanceonlydemandsfullemployment,
itissay,thattheaggregatedemandisequaltothe
productionoffullemployment.

7. Transactionsofdomesticassetsbythecentralbankcanalterthelevelof
internationalreserves,butcannotalteremploymentorproduction.
Monetarypolicyisnotaninstrumentofeconomicpolicywithfixedexchange
rate.Itisnotbecause,anyattemptbythecentralbanktoalterthemoney
supply,buyingorsellingdomesticassets,wouldcauseacompensating
movementininternationalreserves,leavingthenationalmonetarysupply
unchanged.
Rememberthataggregatenationaldemandisthesumofconsumption,
investment,publicspending,andthebalanceofthecurrentaccount.
Consumptionisagrowingfractionofthedisposableincomewherethenettaxes
are.

8. THE POLICIES OF VARIATION AND DIVERSION OF
EXPENDITURE
FunctionsIIandXXdividethefigureintofourzones,oftencalledthe"four
zonesofeconomicimbalance».Eachonerepresentstheeffectsofdifferent
economicpolicies.
➢Inzoneone,thelevelofemploymentistoohighandthecurrentaccountsurplus
toolarge.
➢inzonetwo,thelevelofemploymentistoohighandthecurrentaccountdeficit
toolarge.
➢inzonethree,thereisunemploymentandanexcessivedéficit.
➢inzonefour,unemployment isaccompanied byacurrentaccountsurplus
abovethepre-establishedtarget.

9. Iftheeconomyisinitiallyoutsidepoint1,adjustmentsofthe
fiscalpolicyandtheexchangeratewillbenecessaryto
achieveinternalandexternalequilibrium.
Thechangeinfiscalpolicythatleadstheeconomyto
point1iscalledthepolicyofvariationinspending,
becauseitalterstheleveloftotaldemandforgoods
andservicesintheeconomy.
Theadjustmentoftheaccompanying exchange
rateiscalledtheexpenditurediversionpolicy,
becauseitchangesthedirectionofdemand
betweendomesticproductionandimports.

10. •Ingeneral,bothpolicies,thatofvariation
andthatofexpenditurediversion,are
necessarytoachieveinternaland
externalbalance.
•UndertheBrettonWoodsrules,
variationsintheexchangerate(policyof
expenditure diversion)should,
supposedly,beinfrequent.
•Thisleftfiscalpolicyasthemost
importantinstrumenttobringthe
economytointernalandexternal
balance.

11. THE PROBLEM
OF EXTERNAL
BALANCE IN
THE UNITED
STATES
1.AftertheSecond
WorldWar,USA
became themost
powerfulcountry,In
1944metinBretton
Woodstosignthe
agreementnotto
devalue their
currencies
2.Akindofunited
financialnationsis
established,from
whichthedollar
becomes a
referencecurrency
inthe global
financialsystem
3.Thebrettonwoods
system collapsed
thankstotheNickson
maneuver on
08/15/1971whenhe
decidedtotakethe
goldoutofthesystem
andturnthedollarinto
anaffluentcurrency

12. THE DECLINE AND FALL OF THE BRETTON WOODS
SYSTEM
Many economists
believethattheUS
macroeconomic
packageof1965-1968
wasabigmistake,
andthatithelped
collapsethesystemof
fixedexchangerates.
Theseincreasesinpublic
spending were not
accompanied by
correspondingtaxincreases.
The result was a significant
fiscal expansion that caused
an increase in prices and a
sharp deterioration in the
current account surplus of
the United States.

13. The first signs of future problems
came from the gold market in
London. In late 1967 and early
1968, private speculators
began buying gold in
anticipation of increases in their
price in dollars.
By breaking the links between
the supply of dollars and the
price of gold set by the market,
central banks had thrown
overboard the safeguarding of
the system against inflation.

14. WORLD INFLATION AND THE
TRANSITION TO RATES
FLEXIBLE CHANGE

15. WORLD INFLATION AND THE
TRANSITION TO RATES
FLEXIBLE CHANGE
Inflation in USA at the end of the 60s was a world phenomenon, and it began
to have effects in Europe at the beginning of the 70s, and this is due to the fact
that when the reserve currency country accelerates the monetary growth as
the USA, it increases automatically the rates of monetary growth and inflation
abroad, as central banks buy reserve currency to maintain their exchange rate
and expand, in this process, their money supply.
$.Tostabilizetheirpricelevelandregain
internalequilibrium,theyhadtoleave
fixedexchangeratesandallowtheir
currenciestofluctuate.

16. $.Thewaytoavoidimportedinflationistorevaluethenationalcurrency,thatis,to
reducetheexchangerate.
$.Arevaluationimmediatelyreinstatestheinternalandexternalbalance,without
producinginflationinthecountry.
$.Inconclusion,thecollapseoftheBrettonWoodssystemwasdue,inpart,tothe
unbalancedeconomicpoweroftheUnitedStates.

17. EVOLUTION AND FUNCTIONING OF
THE SYSTEM BRETTON WOODS

18. Introduction:
In July 1944, delegates from 44
nations gathered at the Mount
WashingtonHotel in Bretton Woods
(New Hampshire,USA)
The system created at Bretton Woods
defined fixed exchange rates in
relation to the dollar and an
invariable price of gold in dollars, $
35 an ounce.
a new international monetary system
for the world after the Second World
War.

19. CreationofanInternationalTradeOrganization(ITO)
TheInternationalMonetaryFund
Themembercountriesmaintainedtheirreservesmainlyintheformofgoldordollars
andhadtherighttoselltheirdollarstotheFederalReserveinexchangeforgoldatthe
officialprice.

20. ORIGINOFTHEINTERNATIONAL MONETARY SYSTEM OF
BRETTONWOODS:
InJuly1944,establishedthenewinternationalmonetarysystemfortheworld
aftertheSecondWorldWar,knownasthe“BrettonWoodsagreements.”

21. Thepurpose:
✓TO CREATE A NEW INTERNATIONAL MONETARY SYSTEM THAT WOULD GOVERN AFTER
THE SECOND WORLD WAR.
✓BASED ON LESSONS LEARNED FROM THE PAST, SUCH AS THE USE OF GOLD STANDARDS
AS THE STANDARD
✓LESSONS LEARNED FROM THE GREAT DEPRESSION
✓OFFICIALLY FACILITATING THE RECONSTRUCTION OF NATIONS DEVASTATED BY THE
WAR CONFLICT
✓DRIVING THE ECONOMIC DEVELOPMENT OF NATIONS.

22. oNegotiationsleadinguptotheconferencehadbeengoingonformorethantwoyearsandthere
hadbeencountlessbilateralandmultilateralmeetingsinvolvingamultitudeoffinancialexperts.
oTheBrettonWoodsagreementsshouldformalizeanewinternationalmonetarysystemthatwould
ensure:
-Stabilityoftheexchangerate.
-Hewasavoidingthecompetitivedevaluations.
-Topromotetheeconomicgrowth.
oThatiswhytheimplementationofthenewsystemrequiredahugeinternationalcommitment.

23. AGREEMENTS OFBRETTONWOODS:
TheBrettonWoodsagreementsaretheresolutionsoftheUnitedNationsmonetaryand
financialconferenceheldattheBrettonWoodshotelcomplex(NewHampshire,United
States)from1to22July1944.
Wheretherulesfortradeandfinancialrelationsbetweentheworld’smostindustrialized
countrieswereestablished.BrettonWoodssoughttoendtheprotectionismoftheperiod
1914-1945thatbeganin1914withtheFirstWorldWar.Itwasfeltthatinordertoachieve
peacetherehadtobeafreetradepolicy,whererelationswiththeoutsideworldwouldbe
established.

24. oIntheagreements,itwasalsodecidedtoestablishtheWorldBankandthe
InternationalMonetaryFund,usingtheUnitedStatesdollarasaninternational
referencecurrency.
oBothorganizationsstartedfunctioningin1946.

25. AIMS OF BRETTON WOODS:
-The reconstruction of the economy during the period of the post war.
-The promotion of international economic cooperation.

26. TheoriginalBrettonWoodsagreementsincludedplansforthe
creationofanInternationalTradeOrganization(ITO),butthese
plansremainedunfinisheduntilthecreationoftheWorldTrade
Organisation(WTO)duringthe1990sDecade.

27. BREAK OF BRETTON WOODS :
ThebankruptcyofthesystemagreedatBrettonWoodsoccurredduringtheVietnam
War,whentheUnitedStatesprintedandsentoutbillionsofdollarstofinancethe
war.Moreover,in1971thecountryhadatradedeficitforthefirsttimeinthe
twentiethcentury.

28. •EuropeancountriesbegantoexchangeovervalueddollarsforDeutscheMarkand
gold.
•Thus,FranceandGreatBritaindemandedthattheUnitedStatesconverttheir
surplusdollarsintogold.
•Therefore,thereservesatFortKnox,whereUnitedStatesgoldisdeposited,were
contracted.
•Asaresult,themajoreconomicpowersbegantoabandonthegoldstandard,and
theworldeconomybecamegovernedbyafluctuatingexchangeratesystem.

29. CONCLUSIONS:
➢Theinstitutionswerecreatedtohelprecoverthebenefitsofglobalintegrationandtoinstil
permanenceinthemthroughthepromotionofopenness,trustandinternationalcooperation.
➢Inspiteoftheflawsinitsoperationandthevariousproblems,thissystemappearstobeacaseof
successfulplanning,asthegrowthratesduringtheseyearswerespectacular,withthenew
institutionsprimarilycreatedbytheInternationalMonetaryFundplayinganimportantrole.

30. Conclusions:
TheWorldBankfocusesonlongterminvestmentprojects,
institutionalstrengtheningandassistanceonsocial,
environmentalandpovertyrelatedissues.

31. The Bretton Woods Monetary System (1944 -1971) Explained
in One Minute:
https://www.youtube.com/watch?v= RtFz9q26t5A
The Bretton Woods System explained in five minutes:
https://www.youtube.com/watch?v= Eyft2AAjXNE
What is BRETTON WOODS SYSTEM? What does BRETTON
WOODS SYSTEM mean? BRETTON WOODS SYSTEM meaning
https://www.youtube.com/watch?v=RsL7 --MVOBA
Nixon Ends Bretton Woods International Monetary System
https://www.youtube.com/watch?v= iRzr1QU6K1o
VIDEOS

32. THANK YOU