Question

What was the international monetary system established at the Bretton Woods? What was the major international currency? How were nations conducting their international monetary relations in the Bretton Woods system

Answer 1

Case Specifics: -

The Bretton Woods Agreement, was primarily signed as an agreement in the year 1944 to do away with the then prevalent economic system, of valuing the currency in terms of the dollars which the country could hold.

Economies realized the fact, that they would not be able to hold gold reserves beyond a point, as it was scarce, had alternative uses and was difficult to extract and accumulate so as to appreciate the value of the currency itself.

Over time, the need for replacement arose, and countries got together and decided that their Central Banking System, would keep the exchange rates fixed and would replace the gold standard with US dollars.

The US dollars, became the currency in which most transactions would then take place internationally and since then, it has been largely followed by every world economy. The US dollar was seen as good as gold due to the tremendous progress which the United States of America had made during the time period. Each country agreed to pledge its currency to the dollar which would be exchanged when required.

Further, the International Monetary Fund and the World bank were two premium institutions which were set up, so as to monitor the functioning of the system itself.

Countries also agreed that they would not manipulate their currencies to increase trade. For example, if a country reduced the currency just for helping it get better investments, this would not be allowed in the system.

This allowed for higher flexibility for the economies that agreed to the new rule, as they were largely now, not holding gold reserves but rather, their currencies value was decided by the forces of demand and supply and the size of their growth as compared to the US economy.

Conclusion: -

Thus, we can conclude by saying that prior to the Bretton Woods system, gold was seen as the standard for valuation of a currency in the international markets. This however limited a currencies value to the amount of gold which it was able to extract and gold was a scarce resource. To avoid the same, the US dollar was set as the currency of choice for valuation, and it largely helped firms in growing and the trade volumes which we see today can largely be attributed to the same.

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