What is the Bretton-Woods Agreement?

Economy Nov 07, 2020

As the second world war was coming to an end, the world realized its longing for lasting peace. It was also quite obvious that long-lasting peace would require eradication of poverty , especially from third-world countries where violence had more chances of originating. In July 1994, the allied powers came together to be bound in a mutual agreement aimed at bettering financial conditions globally. The meeting was presided over by delegates from 44 countries and was held at Bretton Woods, New Hampshire which gave it the name, “ The Bretton Woods Agreement”.

To break down the agreement into simpler terms, let’s illustrate it with the help of two commodities; Gold and a three-legged stool. After WWII, United States possessed 2/3rds of the world’s gold reserves which deemed it an unconditional superpower. The need to have a common system of currency was emphasized on and for obvious reasons, the US Dollar was selected as the universal measure for money. The US Dollar’s value in turn, would depend on gold reserves possessed by the States. In simpler words, the value of all currencies could be defined by conversion into Dollars while the value of Dollars could be defined in terms of the amount of gold it equated to. This was done to ensure a standard exchange system and to prevent devaluation of currencies. However, this part of the agreement didn’t last long. A few years down the line after the agreement, the US went through several events like the Vietnam war, which resulted in a gross depletion of its gold reserves. The Dollars in circulation were over valued and in the 1970s, the then President, Richard Nixon declared suspension and later collapse of the Bretton Woods system. Countries could now value their currencies in terms of other countries’ currencies.

The second part of the Agreement, i.e., the “three-legged stool” lives on. To ensure upliftment of the poorer nations, a need for some common backup organization was established. The Agreement came up with three institutions, like the three legs supporting a stool, which would help maintain a global economic flow, namely, The International Monetary Fund(IMF), the World Bank and the World Trade Organisation(WTO). The IMF was supposed to deal with exchange rates and funding countries in need of financial aid. The World Bank was supposed to focus on helping out countries ravaged by WWII by providing financial support and loans. The WTO was supposed to facilitate and monitor international trade and mediate trade wars. While their functions vary from what they were originally supposed to do, they are more relevant to recent times .

Recently, IMF’s Managing Director, Kristalina Georgieva caught the world’s attention when she remarked at the world going through another Bretton Woods “moment”. She drew parallels between the global conditions that prevailed at the times of the agreement and now , with the ongoing pandemic. Many misinterpreted her remarks as an indication of an incoming inflation which led to notable panic. However, Georgieva’s further statements put into perspective the relevance of her remarks.

The remarks were made solely in a spirit of optimism. One global calamity, i.e., the WWII had resulted in the world coming together to facilitate mutual financial upliftment through the Bretton Woods Agreement. The recent Covid pandemic which has shrunken the global economy by around 4.4% also calls for a similar display of mutual cooperation to restore what is lost.  Revolutionary, global-level decisions are the need of the hour and the environment is conducive for a moment representative of the spirit during the Bretton Woods agreement, a moment of brotherhood . To put it in Georgieva’s own words, “Today we face a new Bretton woods moment. Once again- we face two massive tasks: to fight the crisis today – and build a better tomorrow”.

This article has been written by Shriya Chavan for The Paradigm

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