Weakness Of Bretton Woods Agreement
Under the agreement, countries promised that their central banks would maintain fixed exchange rates between their currencies and the dollar. If the value of a country`s currency became too low against the dollar, the bank would buy its currency on the foreign exchange markets. The Bretton Woods Agreement was created in 1944 at a conference of all allied nations of World War II. It took place in Bretton Woods, New Hampshire. The agreement created the World Bank and the International Monetary Fund (IMF), U.S.-backed organizations that would oversee the new system. The Federal Reserve was concerned about an increase in the domestic unemployment rate due to the depreciation of the dollar. In an attempt to undermine the efforts of the Smithsonian agreement, the Federal Reserve lowered interest rates to pursue a predetermined domestic policy goal of full domestic employment. With the Smithsonian agreement, member countries expected dollars to return to the United States, but the reduced interest rates in the United States meant that dollars continued to flow from the United States to foreign central banks. The influx of dollars into foreign banks continued the process of monetizing the dollar abroad and thwarted the goals of the Smithsonian agreement. As a result, the price of the dollar on the free gold market continued to exert pressure on its official rate; Shortly after the announcement of a 10% devaluation in February 1973, Japan and the EEC countries decided to let their currencies fluctuate freely.
This turned out to be the beginning of the collapse of the Bretton Woods system. The end of Bretton Woods was formally ratified by the Jamaica Agreement in 1976. In the early 1980s, all industrialized countries used variable currencies.   (b) The Federal Reserve System has entered into a number of currency swap arrangements with the central banks of Western Europe, Canada and Japan. Under these bilateral agreements, a foreign central bank granted the Federal Reserve System custody credits (in foreign currency) for the same amount of custody credits (in dollars). By signing the agreement, the nations presented their exchange rates to international disciplines. As chief international economist at the U.S. Treasury, Harry Dexter White designed in 1942-44 the International Liquidity Access Plan, which competed with Keynes` plan for the British Treasury.
Overall, White`s scheme tended to favour incentives to bring price stability to global economies, while Keynes wanted a system that promoted economic growth. The “collective agreement was a huge international undertaking” for which two years had been prepared before the conference. These were numerous bilateral and multilateral meetings aimed at finding common ground on the policies that would constitute the Bretton Woods system. 730 delegates from the 44 Allied countries ready to rebuild the international economic system while World War II was still raging and gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, USA, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. Delegates discussed from 1 to 22 July 1944 and signed the Bretton Woods Agreement on the last day […].