The Bretton Woods system was created in1944 and it was named after the town in New Hampshire town where the delegated met and agreed to use the system. Thesystem of management by the Bretton Woods systemcreated the rules necessary for relations in the financial and commercial spheres with the nations were major industrialized then. It was an achievement as it was the first ever agreement that tended to govern relations of independent nations monetarily. The agreement that was made created the ground for the exchange of one currency to another internationally. The agreement or the system contributed to the creation of International Bank for Reconstruction and Development, today better known as the World Bank and the International Monetary Fund (IMF) (Eichengreen, 1993)
The International Monetary Fund was created with the intention of monitoring of exchange rates and working to lend the reserve currencies to those countries that have demonstrated to have trade deficits. The World Bank was created was created with an intention of provision of capital to the poor and underdeveloped across the world. But with time some of their roles have changed and are different today. There were 44 nations that participated in the discussions that brought about the Bretton Woods System. Each of the 44 nations had to contribute some membership fee which was necessary for the funding of the institutions created by the Bretton Woods agreement. The amount each nation was to contribute was dependent on the country’s ability economically and worked to dictate its voting power in the group.
The participants with an intention of setting free the international trade provision of postwar funds necessary for reconstruction, the nations present agreed to work in fixing their individual exchange rates. This they intended to achieve by tying their respective currency to the U.S. dollar. The politicians from United States in the conference assured the other nations and the rest of the world, of their currency’s as being dependable and they linked the United States dollar to gold with it being equated to US$1 equaled 35 oz. of bullion (Carbaugh, 2011). The nations present also came to an agreement that they will buy and sell U.S. dollars so as to maintain their currencies within the range of 1% of the set fixed rate.
In the discussion John Maynard Keynes, who was a renowned British economist, and had contributed a lot in the discussion and even had done a lot in the drafting of the agreement. He proposed the opposite of the gold standard that was being pushed by the American politicians. He argued under the system being developed, the created monetary system will be influenced by the nations that control it (Carbaugh, 2011). Keynes went further in suggesting the use of a single currency globally which would not be tied to politics or gold as the developed system suggested. His argument was not adopted by the present members.
The Bretton Wood system was drafted not many years after the Great Depression of the 1930 also it was drafted almost at the end of the Second World War. The system attempted to address some of the global ills which had been going on as from the First World War. Some of the ills include governments with the inclusion of the United States attempted to control imports and exports so as to offset blockades during the time of war. This made nations to manipulation their currencies with an intention of shaping foreign trade. The restrictive market acts and the currency warfare led to the depression, devaluation and deflation which led to the economical problems of 1930s (Hagele, 2010).
In the early 1960s, it was assumed that the U.S. dollar's value against that of gold was highly overvalued. A significant increase of spending by President Lyndon Johnson's in his Great society programs and the increased military budget due t o the cold war and the problems in Vietnam War gradually highly affected the overvaluation of the dollar. This had a huge influence on how other nations in Europe and Japan viewed this. The high expenditure on the military by the United States due to the Vietnam war led to massive inflation.
Rise of other economic power such as Japan which was developing its economy at a high rate was another challenge to the System. With the growth of more industrialized nation, the United States was no longer the dominant power and thus its currency dominating other currencies created unease in the new developing nations. Japan for example had more cash reserves that totaled more than those of the United States. There were higher level of economic growth in Japan and also trade and it per capita was slowly progressing to almost the same as that of the United States and other prosperous European nations. Japan was radically narrowing the gap between itself and the United States.
The system adopted in Bretton Woods collapsed in 1971, this was the then United States president, Richard Nixon decided to severe the relationship between the United States dollar and gold. This decision he decided so as to prevent a run on Fort Knox, which had a third of the gold bullion that was important to cover the United States dollars that was in foreign hands (Hagele, 2010). This made major economies to let their currencies to float freely. This led to a difficult transition which led to challenges such as rise in the prices of products such as oil; other challenges included banks falling and rise in inflation.