Par Value Monetary System example essay topic

The Bretton Woods Agreement was a historical first, it signified the creation of the first monetary order designed to govern currency relations between countries. What was even more astounding was this conference was taking place in the mist of World War II. Actually the World War was one of the main of the reason that the conference got under way in the first place. The Allied Powers were determined to avoid the monetary chaos that followed the end of the last Great War. It was with that in mind that all forty-four allied nations and Argentina, led by John Maynard Keyes a world renowned British economist, and Harry Dexter White the United States minister of the treasury set out to establish a new monetary system. The conference at Bretton Woods gave birth to The International Monetary Fund (IMF).

The IMF began its operations on March 1, 1947. It was designed to promote international monetary stability by establishing a global monitoring system that regulates and advises on monetary problems. The first issue they tackled was the problem with exchange rates. The floating rate system was discouraging international trade by competitive currency depreciation.

The result was a world wide monetary policy system that simply wasn't working, and could create major problems in the oncoming years of globalization. There was speculation of returning to the "gold standard", however most governments wanted nothing to do with the gold standard of monetary policy because they wanted to be able to retain their right to revise currency values. A new monetary policy was established with the US dollar as the dominant currency. The system implemented was a par value or adjustable peg system.

In this system the US dollar was set at a value of thirty-five dollars per ounce of gold. All other currencies than set their par value in relation to either gold or the US dollar. Once that par value was set the government had to limit exchange fluctuations to plus or minus one percent. The governments' also retained their right to adjust their par value to correct a "fundamental disequilibrium" in their balance of payments. What exactly qualifies as a fundamental disequilibrium in your balance of payments was never defined. Each member of the IMF was also required to pay a quota subscription to the IMF.

The size of each quota reflected your economic importance. The United States having far and away the strongest economy at the time was required to pay the largest quota. The quota was to be paid using a seventy-five twenty-five rule. Seventy five percent of the quota was too paid in your own currency, while the other twenty-five percent was paid using either gold or a gold convertible currency (US dollars).

The size of the quota also determined how much foreign currency a member can borrow, as well as the voting power of the member nation. The United States quota was so larger that they garnered one-third of the votes available, and with it veto power over all future decisions made by the IMF. The IMF also set up a system of controls, in which it regulated currency practices. IMF member nations were forbidden to engage in discriminatory currency practices or exchange regulations. This was done to discourage the economic warfare that was prevalent during the 1930's. There were only two exceptions to this rule.

The first exception is designed to maintain sufficient capital controls. While governments were forbidden to regulate currency movement in regards to the trade of goods and services, they were encouraged to limit the amount of foreign money coming in and out of their economy. The second exception says that the member nation can defer their convertibility obligations during a post war transitional period. This was designed to enable the war torn nations to rebuild after a grueling war.

This was extremely important because the IMF would begin operations after World War II and many of its members suffering tremendous losses at the hands of Germany The other major development that came as a result of the Bretton Woods Agreement was the creation of the International Bank for Reconstruction and Development also known as the World Bank. The World Bank is the world's foremost source of economic support for developing nations. The goal of the World Bank is to improve standards of living and eliminate poverty. They also help to stimulate growth by encouraging foreign direct investment. The World Bank was set up as an independent organization of the United Nations, with all members required to maintain a membership in the International Monetary Fund. The Bretton Woods Agreement was a successful venture for many years, until the very foundation of the system started to weaken.

The success of the agreement was directly tied to the US dollar. At the time of the agreement the US dollar was at one of its strongest points in its history, and was backed by two-thirds of the worlds gold supply. However that simply could not last, the US was unable to maintain the appropriate gold reserve to satisfy international confidence. In late 1973, the US suspended the convertibility of US dollars to gold and allowed the market to set the value of the dollar. That one act in essence ended the par value monetary system.

A mere eighteen months later, the Smithsonian Agreement was reached and officially ended both the par value system and the gold exchange standard in favor of a floating monetary system. The Bretton Woods Agreement Works Referenced Haw trey, R.G. Bretton Woods for Better or Worse. London, 1946. Horse field, J. Keith. The International Monetary Fund, 1945-1965: Twenty Years of International Monetary Cooperation. Washington D. C, 1969.

Shonfield, Andrew. International Economic Relations of the Western World. London 1976. Websites web web.