The Historical Development of the International

Financial Market from Bretton Woods

Essay question:
To analyse the development of monetary
institution: the beginning of Bretton Woods
system and its collapse

1
Table of Contents

Table of Contents............................................................................................................................2
Abstract...........................................................................................................................................3
Introduction.....................................................................................................................................3
Section I: Bretton Woods system...................................................................................................5
Section II: The rise of monetary systems and the theory of International Monetary System
The International Monetary System (IMS) was founded in 1985 as one of the largest publicly
traded barter companies in the world which was continually expanding its network worldwide.
The network of IMS enables companies to acquire new business, create cost savings and
improve operations by taking advantage of barter opportunities in their business models. The
International Monetary System is the rules and procedures for the exchange of different national
currencies. Under IMS System, different national currencies are exchanged for each other by
rules and procedures which are necessary for its system to define a common standard of value
for the world currencies. And since each country sets its own rules on how the value of its
currency will be allowed to vary against other currencies, there are no formal rules for IMS. . . .6
Section 2.1 Monetary Theory.....................................................................................................7
Section 2.2 The Gold Standard...................................................................................................7
Section 2.3 Fixed market............................................................................................................8
Section III: The IMF role in operation under the Bretton Woods system......................................9
Section IV: The role of World Bank under the Bretton Woods system.......................................11
Section V: Bretton woods broke down and the end of its system................................................12
Section VI: International monetary system after the Bretton Woods system in 1971..................14
Section 6.1 Current International Monetary System................................................................15
Section 6.2 Floating exchange rate...........................................................................................15
Section 6.3 Current IMF ..........................................................................................................16
Section 6.4 World Bank Today................................................................................................19
Section VII: European Snake in tunnel .......................................................................................19
Section VIII: European Monetary System (EMS)........................................................................20
Conclusion ..................................................................................................................................22
Assessment of the system for contemporary for financial global environment ..........................23
Bibliography:................................................................................................................................24

2
Abstract
This paper introduced the system of Bretton Woods which was established in 1944. Starting
with the economic situation after World War I, this essay outlines the importance of creating a
supranational organisation promoting international trade flows and monetary stability. It aims to
prevent currency competition and promoting monetary co-operation among nations. By the time
of Bretton Woods System, International Monetary Fund (IMF) and World Bank were also
established to support the Monetary Theory under Bretton Woods System. The gold standard,
along with the fixed exchange rates was used during the Bretton Woods International Monetary
System but however, later in 1971, Bretton Woods System collapsed and the fixed exchange
rate has been changed to the floating exchange rates instead.

The IMF and World Bank continue to help the developing countries and carrying over 10,000
projects worldwide.1 Although, the international monetary system has collapsed, the European
countries agreed to maintain stable exchange rates by preventing exchange fluctuations and
established the European Monetary System. This arrangement was called the European ‘snake
in the tunnel’2 because the community currencies floated as a group against outside currencies
such as the dollar. This summary will be the guidance for the learner to explore more
information from this essay.

Introduction
In times of globalisation, the economic environment is changing rapidly. Capital movements
have become larger and at the same time less controllable. Therefore, the need for a stabilising
system has become more and more apparent. In the past such a system has been established at
the conference of Bretton Woods. Recently leading industrial nations have been calling for a
renewal of the purpose and the spirit of this system in order to cope with the growing size of
international trade and capital flows.3

This essay gives a short overview of the development of monetary institution with the beginning
of Bretton Woods system and its collapse, especially problems and difficulty. It identifies
1
Bretton Woods Project, What is the Bretton Woods Project? (2006) <http://www.brettonwoodsproject.org/project/about.shtml
> at 18 September 2009.
2
Horst Ungerer, ‘et al’, The European Monetary System: Recent Development (1st ed, 1986) 5.
3
Paul R. Krugman and Maurice Obstfeld, International Economics- Theory & Policy (7th, 2006) 485.
3
mistakes that have been made and points out aspects that have to be taken into account when
implementing a system similar to the International Monetary System and Breton Woods
system.4

Under the Bretton Woods system, there were two financial institutions launch to promote the
economic development and an open world economy. The primary goal was to encourage growth
and international economic cooperation by allowing goods and capital to flow around the world
as liberally as possible.5 The IMF was designed to promote an open world economy by
encouraging monetary cooperation, currency convertibility, international liquidity, and the
elimination of exchange restrictions, all of which are vital to the expansion of foreign trade and
investment.6 The World Bank was established to support foreign investment directly by
providing guarantees to private investors, participating in private loans, and, when private
capital is not available on reasonable terms, investing its own capital.7

However, this essay also covers the information that relates to the Bretton Woods system,
including the IMF and World Bank that performed in the past and up until today. Moreover, as
countries have different currencies, and the currency of one country cannot be used to buy goods
from another. Most countries maintained the official par values of their currencies by
intervening in the foreign exchange market.8 Thus, it is necessary for importers to convert
money into the currency of the countries from which they are purchasing goods. The floating
exchange rates have now been used instead of fixed exchange rates after the Bretton Woods
Collapsed.9 The information regarding this point will be discussed in further in this essay.

Briefly, this essay is organized into eight sections with additional information in sections.
Section I will provide information about the Bretton Woods system then Section II will explain
the rise of monetary systems and monetary theory. Section III is about the operation of the IMF

4
Sabine Dammasch, The System of Bretton Woods: A lesson from history (2007) The Hidden Mysteries
<http://www.hiddenmysteries.org/money/policy/b-woods.pdf> at 27 July 2007.
5
Bernhard Boockmann and Axel Dreher, ‘The contribution of the IMF and the World Bank to economic freedom’ (2003) 19(3)
European Journal of Political Economy 634 <http://www.sciencedirect.com> at 25 June 2003.
6
Sidney Dell, ‘The History of the IMF’ (1986) 14(9) World Development 1203.
7
Anne O. Krueger, ‘The Role of the World Bank as an International Institution’ (1983) 18 Carnegie-Rochester Conference
Series on Public Policy 281.
8
Prabirjit Sarkar, ‘The World Bank and the IMF as international economic institutions’ (1990), Roskilde University IDS Paper
Series <http://ssrn.com/abstract=1021552 > at 20 June 2008.
9
Jonathan Stevenson, Preventing Conflict: The Role of the Bretton Woods Institutions (1st ed, 2000) 8.
4
under the Bretton Woods system. Section IV is about the role of World Bank under the Bretton
Woods system. Section V will detail the underlying cause of the Bretton woods breakdown and
the end of its system. Section VI will explain the formal changes in international monetary
system after the Bretton Woods system in 1971. The European currency system will explain in
Section VII and VIII. This essay explores critical issues and developments that have affected the
system’s creation and evolution.

Section I: Bretton Woods system

In the mid 20th century, the Bretton Woods system established the rules for commercial and
financial relations between the world’s major industrial countries. The Bretton Woods system is
commonly understood to refer to the international monetary regime that prevailed from the end
of World War II until the early 1970s.10 Taking its name from the site of the 1944 conference
that created the International Monetary Fund (IMF) and World Bank, the Bretton Woods system
was the first example of a fully negotiated monetary order intended to govern currency relations
among sovereign states.11 The Bretton Woods Agreement was also aimed at preventing currency
competition and promoting monetary co-operation between nations. Under the Bretton Woods
system, the IMF member countries agreed under the system of exchange rates that could be
adjusted within defined parities with the U.S. dollar or, with the agreement of the IMF, changed
to correct a fundamental disequilibrium in the balance of payments. A per value system
remained in use from 1946 until the early 1970s.12

Advocates of the Bretton Woods system believed that stable exchange rates would avoid the
‘beggar thy neighbour’ policies of the 1930s and benefit economies around the world by
expanding international trade.13 However, exchange rates became uncompetitive over time
because of the infrequent changes in parities. In addition, there were often large destabilising
flows of currency, as speculators bet on the value at which the fixed exchange rate would be re-

10
Benjamin J. Cohan, ‘Bretton Woods System’ in Barry Jones (ed.), On the System of Bretton Woods (2002) Routledge
Encyclopedia of International Political Economy 4.
11
Ibid.
12
Ibid.
13
Ibid.
5
fixed.14 There were also concerns that a fixed exchange rate system did not allow countries
enough freedom to pursue their own monetary and fiscal policies.15

Section II: The rise of monetary systems and the theory of International Monetary System
The International Monetary System (IMS) was founded in 1985 as one of the largest
publicly traded barter companies in the world which was continually expanding its network
worldwide.16 The network of IMS enables companies to acquire new business, create cost
savings and improve operations by taking advantage of barter opportunities in their
business models. The International Monetary System is the rules and procedures for the
exchange of different national currencies.17 Under IMS System, different national
currencies are exchanged for each other by rules and procedures which are necessary for its
system to define a common standard of value for the world currencies.18 And since each
country sets its own rules on how the value of its currency will be allowed to vary against
other currencies, there are no formal rules for IMS.19

IMS has two types of rate change systems which are fixed rate and flexible rate systems. A
fixed-rate exchange system is one in which different countries have agreed upon the rates at
which their various currencies will be exchanged in international trading, or one in which one
country has a fixed-exchange rate for its own currency which it is prepared to defend.
Nevertheless, before the floating exchange rate system was used, all the currency matters
existed among the western industrial countries. However, the floating-exchange rate system
permits each currency to find its own level of exchange, which will change from time-to-time,
as economic conditions change.20

14
James C. Ingram, International Economics (1st ed, 1983) 173.
15
James Powell, Bretton Woods agreement: Developing a New International Monetary System (2007) Canadian Economy
<http://www.canadianeconomy.gc.ca/English/economy/1944Bretton_woods.html> at 4May 2007.
16
Barry Eichengreen, Globalizing Capital: A history of the International Monetary System (2nd ed, 2008) 2.
17
Ibid.
18
Ibid.
19
Robert Solomom, The International Monetary System, 1945-1981 (2nd ed, 1982).
20
Eichengreen, above n 16, 59.
6
 Section 2.1 Monetary Theory
Under the macroeconomics system, monetary theory is one of the important sub areas which
aim to explain the role and relationship of money in its system. It is also analyses the role of
money in terms of demand and supply of money in such an economic system.21 One sector of
the macroeconomic system is conceived as the monetary sector, and the monetary sector has a
natural tendency to converge to monetary equilibrium. A stock market crash can be attributed to
an excess demand for money relative to supply, causing stockholders to sell stocks to raise
money.22 Theoretically, the macroeconomic system converges to equilibrium and one necessary
condition for macroeconomic equilibrium is monetary equilibrium. Monetary theory usually
assumes as a rough approximation that the money supply is fixed by monetary authorities, and
can be changed as necessary for the public’s interest. The demand for money, however, is
outside the control of public officials and is a function of other economic variables, particularly
aggregate income, interest rates, the price level, and inflation.23

For the explanation of monetary theory in depth, the macroeconomic system adjusts to bring the
demand for money in line with the supply of money when monetary authorities change the
money supply.24 But if the economic is in recession and the money supply is increase, the extra
money will be stimulating all businesses.25 On the other hand, as the demand for money grows
and the money supply is increased, the economic is at full employment, the extra money will
26
cause as its follow the increasing of the demand and supply chains. In fact, the inflation will
happen if the real value of money supply hasn’t fallen sufficiently after prices go up.27

Section 2.2 The Gold Standard

The international gold standard developed out of the commodity money standards that prevailed
for many centuries up through and including the nineteenth. It was in a sense, the industrial
revolution, or more broadly the technological and organizational advances associated with the

21
Molly Thurman, Monetary Theory (2006) e- articles <http://e-articles.info/e/a/title/Monetary-Theory/> at September 2006.
22
Ibid.
23
Ibid.
24
Ibid.
25
Ibid.
26
Ibid.
27
Ibid.
7
advent of modern economic growth.28 The gold standard was also an international standard
determining the value of a country’s currency in terms of other countries’ currencies. The gold
standard system is the specification standard which using only gold to be the standard of value
for circulation between nations of gold coins.29 Meanwhile, the nation that exported more than
imported would receive payment as gold which is such an influx of gold rises priced. 30 For
instance, the higher prices resulted in decreasing the demand for exports, an outflow of gold to
pay for the now relatively cheap imports, and a return to the original price level. Once this
movement toward the gold standard was introduced, it gains momentum. The shift to gold fed
on itself through the operation of network externalities. There were advantages, in other words,
to maintaining the same monetary arrangement as other countries.31

However, the gold standard is not currently used by any government or having been replaced
completely by fiat currency. During World War I the gold standard broke down, as major
belligerents resorted to inflationary finance, and was briefly reinstated from 1925 to 1931 as the
Gold Exchange Standard. Under this standard, countries could hold both gold and Dollars or
Pounds as reserves, except for the United States and the United Kingdom, which held reserves
only in gold.32 This version broke down in 1931 following Britain’s departure from gold in the
face of massive gold and capital outflows. Moreover, the government of nations were using the
lack the monetary policy, the economies under such its system was unable to avoid monetary.

Section 2.3 Fixed market

At the Bretton Woods international conference in 1944, a system of fixed exchange rates was
adopted, and the International Monetary Fund International Monetary Fund (IMF), specialised
agency of the United Nations, established in 1945. It was planned at the Bretton Woods
Conference (1944), and its headquarters are in Washington, D.C.33

28
Michael D. Bordo and Barry Eichengreen, ‘The rise and fall of a Barbarous Relic: The Role of Gold in International Monetary
System’ in Guillermo Calvo, ‘et al’ (eds.), Money, Capital, Mobility and Trade: Essays in honor of Robert Mundell (2001) 53.
29
Ibid 54-55.
30
Ibid.
31
Ibid 55-56.
32
Michael D. Bordo, Gold Standard, ‘The Gold Standard, Bretton Woods and other Monetary Regimes: An Historical
Appraisal’ (Working Paper NoW4310, Harvard University, Department of Economics; National Bureau of Economic Research
(NBER), 1993).
33
Dammasch, above n 4.
8
Under the agreement, the dollar remains convertible into gold and all countries were use the
value of gold to fix their currency but not to exchange their currency for gold. According to the
gold-exchange standard, the system allow nations fix the value of their currencies not with
respect to gold, but to some other foreign currency, which is in turn fixed to and redeemable in
gold. 34 Most nations fixed their currencies to the U.S. dollar and retained Dollar reserves in the
United States, which was known as the key currency country.35 Under the fixed rate system,
Government maintains target rates and if rates are threatened, central banks buy and sell
currency.36 However, the advantage of this fixed rate system is that it has the stability and
predictability. On the other hand, disadvantage will occur as the country loses control of
monetary policy which can be noted that monetary policy can always be used to control an
exchange rate.37 Moreover, the disadvantage of fixed rate exchange is that if a fixed rate may
devalue as an alternative to devaluation, the country may impose currency controls.38

A fixed exchange rate regime imposes discipline in two ways. First, the need to maintain a fixed
exchange rate puts a brake on competitive devaluations and brings stability to the world trade
environment. Second, a fixed exchange rate regime imposes monetary discipline on countries,
thereby curtailing price inflation.39 Although monetary discipline was a main objective of the
Bretton Woods agreement, it was recognised that a strict policy of fixed exchange rates would
be too flexible. It would probably break down just as the gold standard had in the history. In
some cases, a country’s attempts to reduce its money supply growth and correct a persistent
balance of payments deficit could force the country into recession and create high
unemployment.40

Section III: The IMF role in operation under the Bretton Woods system
The IMF was founded to help restore economic stability and growth in the repercussion of the
World War II. Half a century later, the institution is still working to promote these goals.
However, the world has changed. In particular, the international economy is now dominated by

34
Ibid.
35
Bordo, above n 32.
36
Michael D. Bordo and Finn E. Kydland, ‘The Gold Standard As a rule: An Essay in Exploration’ (1995) 32 Explorations in
Economic History <http://www.sciencedirect.com.simsrad.net.ocs.mq.edu.au> [424] at 29 April 2002.
37
Ibid 425-6
38
Ibid 427.
39
Charles Hill, Global Business Today (5th ed, 2008) 330.
40
Ibid 331.
9
massive private capital flows, flows that are opening new opportunities for investment, trade,
and growth to an ever larger number of countries.41

The agreement reached at the Bretton Woods established two multinational institutions, the IMF
and the World Bank. The IMF was established in 1945 and became operated in March 1947. It
had an original membership of 44, which now increased to 150 countries. As membership of the
World Bank is conditional upon IMF membership, it has also about 150 country shareholders.
Almost all the countries of the capitalist world and many socialist countries such as China,
Hungary, and Poland have joined the IMF World Bank organisation. 42 The duty of the IMF
would be to maintain order in the International Monetary System (IMS) and that of the World
Bank would be promoting general economic development.43 The Bretton Woods agreement also
called for a system of fixed exchange rates that would be policed by the IMF.44 In its final form
the Bretton Woods Monetary Agreement was unworkable because it lacked of mechanism to
regulate persistent payments imbalances between countries.45 The ensuing balance-of-payments
disequilibria were a constant source of monetary instability in the IMF Bretton Woods system. 46
The aim of the Bretton Woods agreement was to avoid a repetition of that chaos through a
combination of discipline and flexibility.

The IMF position is to loan foreign currencies to members during their short periods of balance
of payment deficiency, when a rapid tightening of monetary or fiscal policy would harm
domestic employment. Countries were to be allowed to borrow a limited amount from the IMF
without adhering to any specific agreement.47

41
Rosa M. Lastra, ‘The International Monetary Fund In Historical Perspective’ (2000) 3(3) Journal of International Economic
Law [507]
< http://jiel.oxfordjournals.org/cgi/content/abstract/3/3/507> at September 2000.
42
Sarkar, above n 8, 2.
43
Ibid.
44
Barry Eichengreen, Global Imbalances and the Lessons of Bretton Woods, (1st ed, 2007) 39.
45
Francis J. Gavin, International Monetary Fund and World Bank - The flaws of the imf bretton woods system (2009)
Encyclopedia of the New American Nation < http://www.americanforeignrelations.com/E-N/International-Monetary-Fund-and-
World-Bank-The-flaws-of-the-imf-bretton-woods-system.html> at 2 November 2009.
46
Ibid.
47
Hill, above n 39, 331.
10
Section IV: The role of World Bank under the Bretton Woods system
The World Bank was originally established to support reconstruction in Europe after World War
II, but since reframe its mission and expanded its operations both geographically and
substantively.48 World Bank policy packages are more inspired by ideology and pre-conceived
theory than derived from concrete analysis of specific country situations.49 The World Bank
provides technical assistance and funding for projects and policies to encourage development in
poor countries.50 Under the circumstances, the operations of Word Bank will realize the
countries’ potential by viewing the development as a long-term, integrated endeavour. The Bank
gives particular attention to projects that can directly benefit the poorest people in developing
countries.51 Each year, The World Bank provides over $24 billion in assistance to developing
and transition countries.52 Every project supported by the Bank is intended to work collaboration
with national governments and local agencies, and regularly in cooperated with other
multilateral assistance organizations.53

For instance, The Bank is helping the developing countries to be more efficient to gain access to
such necessities as safe water and waste-disposal facilities, health care, family-planning
assistance, nutrition, education, and housing.54 There have also been changes to infrastructure. In
transportation projects, World Bank has paying attention to farm-to-market road, power and
lighting for villages and small farms rather than in cities.55 Industrial projects, the Bank
supporting small enterprises in development of using oil, gas, coal, fuel wood and biomass to be
the alternative sources of energy.56
At present, the World Bank has become the key financier of development projects in developing
countries. It has also become the Third World's largest creditor and also become the world’s

48
Bank information Center, Overview of World Bank (IBRD & IDA) < http://www.bicusa.org/en/Institution.5.aspx> at 10
November 2009.
49
Sarkar, above n 8, 8.
50
David Driscoll, ‘The IMF and the World Bank: How Do They Differ?’ (1996) International Monetary Fund
< http://www.imf.org/external/pubs/ft/exrp/differ/differ.htm> at August 1996.
51
Ibid.
52
Bank information Center, above n 48.
53
Driscoll, above n 50, 6.
54
Ibid 5.
55
Ibid 6.
56
Ibid .
11
leading development agency.57 It has improved after the World Bank's failure to achieve its
major mission of poverty improvement is now recognized at the most significant levels of the
Bank itself under Bretton Woods’s system.58 The World Bank Group now is consist of five
separated arms, which are the International Bank for Reconstruction and Development (IBRD),
the International Development Association (IDA), both of IBRD and IDA work primarily with
governments, the International Finance Corporation (IFC) and Multilateral Investment
Guarantee Agency (MIGA) directly support private businesses investing in developing
countries. The fifth arm is the International Center for Settlement of Investment Disputes
(ICSID), which arbitrates disagreements between foreign investors and governments.59

Section V: Bretton woods broke down and the end of its system
Bretton Woods is a place in New Hampshire. The meeting held for planning and sharing of
political view such as the experience after the Great Depression. It is also create international
basis for exchanging in one currency by setting the standard to another countries. The agreement
was signed to set up the three big global institutions which are IMF, IBRD (now is one of the
World Bank Group) and the International Trade Organization (ITO).60 But as a result, the ITO
never came established. According to the final conference of Bretton Woods, Mr. President has
mentioned that the Bretton Woods members have shown that forty four nations are able to work
together for the constructive task in amity and unbroken concord.61 However, the President was
also right to think that the Final Act at Bretton Woods was a magnificent achievement. Bretton
Woods symbolise a different class of cooperation. It was a shift away from the tacit, convention-
based cooperation of central bankers to a sweeping, rule-based, multilateral cooperation of
states.62
During the 1930s, the states facing many problems such as the instability of the exchange rate,
the shortage of gold and the lack of methods to adjust balance of payments.63 Since then, the

57
The 1995 People's Summit (P7), Halifax Initiative: Beyond 50 Years
<http://www.chebucto.ns.ca/Current/P7/bwi/cccbw.html> at 2002.
58
Ibid.
59
Bank information Center, above n 48.
60
John Braithwaite and Peter Drahos, ‘Bretton Woods: Birth and Breakdown’ (2001) Global Business Regulation [97]
< http://vangogh.fcjs.urjc.es/~jesus/Teaching/MFI/Temario_files/Bretton%20Woods.pdf> at April 2001.
61
Ibid 98.
62
Ibid.
63
Ibid.
12
IMF had revaluation some scope under IMS system to deal with all the difficulties.64 The World
and ITO aim to assist Europe and development countries for industrial reconstruction to achieve
industrialisation and to stop the balance of payments problems.65

After the war, the whole Bretton Woods system broke down. The thing that broke down was the
rules of cooperation for the convertibility of the dollar into gold and the exchange rates regime.
On the other hand, the US has run to insufficiency after provided the liquidity in IMS and the
US dollar became the international reserve currency.66 And if the shortage continued, other
countries would distrustful in the Dollar as a reserve currency and result in exchange their
dollars into gold. However, the deficits continued to increase even if the US tried to attempt to
correct its balance of payment because the US had to pay for its war in Vietnam.67

Thus, the US announced in August 1971 to abandon the convertibility of the dollar because the
decrease of the confidence in US dollar and the seeking to conversion of their dollars into gold
from States.68 The exchange rates regime under Bretton Wood ended with other state were
forced to float their own currencies. There was the minor matter that the US and other states
were in breach of the IMF agreement. The real problem lay in deciding on a new form of
cooperation for exchange rates.69

Furthermore, there were some discussion mentioned that Bretton Woods was successful because
it embodied a series of assignment rules for economic policy instruments.70 The rules were to
use monetary and fiscal policy to maintain internal balance with also to use international
reserves to finance temporary departures from external balance and to use changes in the

64
Dell, above n 6, 1210.
65
Braithwaite and Drahos, above n 60, 99.
66
Ibid 100.
67
Eichengreen, above n 44, 99.
68
Braithwaite and Drahos, above n 60, 98.
69
Ibid 98-9.
70
Krugman and Obstfeld, above n 3, 554.
13
exchange rate to attain medium run external balance. However, the system was so short operated
because the equilibrium was based on a series of coincidences, an equilibrium configuration of
exchange rates, adequate reserves, and confidence worries not sufficient to topple the system.
An adaptive mechanism to restore balance was non-existent once the coincidences vanished.71

Section VI: International monetary system after the Bretton Woods system in 1971
After 1971, the IMF lost its sense of purpose as guardian of the international monetary system.
The international monetary system was scrapped for flexible exchange rates. At the end of 1996,
every country has its own system.72 An international monetary system on the strict sense of the
world does not presently exist.73 Under the impression of IMS, large numbers of employees of
banks and financial institutions has to carry out their work under a set of rules individually and
the internal control for the operational stability has been removed74

The world’s monetary officials were deliberating the problem of international liquidity in the
period of 1966-1971. They had been discussing this problem for several years but they were by
no means agreed that the supply of liquidity in the international monetary system was actually
inadequate or that unusual new arrangements for creating liquidity were necessary.75 In addition,
the unstructured nature of the current international monetary system is apparent in the way it
deals with each of the three fundamental tasks of any monetary system which were supplying
international liquidity, determining exchange rates, and providing an international framework
for national economic policies.76 However, the reform of the international monetary system has
not been on the political agenda for many years after Bretton Woods system collapsed.

71
Michael D. Bordo and Barry Eichendreen, A Retrospective on the Bretton Woods system (1st ed, 1993) 107.
72
Robert A. Mundell, ‘The International Monetary System in the 21st Century:Could Gold Make a Comeback?’ (1997) Center
for Economic Policy Studied [3] <http://www.robertmundell.net/pdf/The%20International%20Monetary%20System%20in
%20the%2021st%20Century.pdf> at 12 March 1997.
73
Ibid.
74
Hugo S. Price, The international monetary process (2005) Gold-Eagle <http://www.gold-
eagle.com/editorials_05/salinas070505.html> at 5 July 2005.
75
Magaret Garritsen de Vries, The International Monetary Fund 1966-1971: the system under stress (1976) 4.
76
Peter B. Kenen, ‘et al’, International Monetary System (1st ed, 1994) 1.
14
 Section 6.1 Current International Monetary System
After Bretton woods collapsed, the European countries agreed to maintain stable exchange rates
by preventing exchange fluctuations. This arrangement was called the European ‘snake in the
tunnel’ because the community currencies floated as a group against outside currencies such as
the dollar.77 However, a new effort to achieve monetary cooperation was launched. EC
established European Monetary System, and created the European Currency Unit (ECU). 78 The
European Monetary system (EMS) was launched as a bridge to help lead the ultimate goal of
Economic and Monetary Union (EMU).79 Since then, the European leader were keen to maintain
the principle of exchange rate and faced many difficulties in setting the right rate for all
European members and wasn’t entirely successful because some member was less committed to
80
it than others. The important part of EMS is to commit all member governments to keep their
currencies exchange rates/ within bands. This particular role was designed to help create stable
commerce without the fear of sudden changes in the value of currencies.

Section 6.2 Floating exchange rate

Floating exchange rate is known as a floating currency. This currency is set by the foreign
exchange market through supply and demand for that particular currency relative to other
currencies.81 The central bank needs to keep the stability of the market of buying or selling
currencies to avoid the instability of the exchange rate from getting too high or too low. 82
However, there are some advantages of the floating exchange rates such as full employment,
stable growth and price stability.83 In the Meantime, the Exchange rate adjustment has purposed
to promote those goals by work as an automatic stabilizer.84

77
Daniel P. Kane, Principles of International Finance (1st ed, 1988) 118.
78
Krugman and Obstfeld, above n 3, 631.
79
Civitas-the Institute for the study of Civil Society, European Monetary System,
<http://www.civitas.org.uk/eufacts/FSECON/EC9.htm> at 24 September 2007.
80
Ibid.
81
Atish R. Ghosh, ‘et al’, Exchange rate regimes choices and consequences (1st ed, 2002) 40-2.
82
All Business, Dictionary of Banking: floating exchange rate <http://www.allbusiness.com/glossaries/banking/4941812-
1.html> at 2 November 2009.
83
Policy Archive, ‘Fixed Exchange Rates, Floating Exchange Rates, and Currency Boards: What Have We Learned?’ (2004)
CRS Report for Congress < https://www.policyarchive.org/bitstream/handle/10207/1311/RL31204_20040123.pdf?sequence=1>
at 23 Jan 2004.
84
Ibid.
15
Also, a government wanting to maintain a fixed exchange rate does so by either buying or
selling its own currency on the open market. This is one reason governments maintain reserves
of foreign currencies. If the exchange rate drifts too far below the desired rate, the government
buys its own currency off the market using its reserves. This places greater demand on the
market and pushes up the price of the currency. If the exchange rate drifts too far above the
desired rate, the opposite measures are taken.85

Section 6.3 Current IMF

The IMF is an organization that formed with a stated objective of stabilizing international
exchange rates and facilitating development which is located in Washington, D.C., in the United
States.86 The IMF initiated with 29 nations but there are now about 186 countries become
members. The term ‘country’ also refers to some territory areas that are not states. The IMF is
working to foster global monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce poverty around
the world.87 IMF current task is to monitors the world's economies by keeping track of economic
developments on a national, regional, and global basis, consulting regularly with member and
providing them with macroeconomic and financial policy advice. IMF also provides practical
guidance and training on how to upgrade institutions, and design appropriate macroeconomic,
financial, and structural policies to third world countries. The main mission of IMF is to provide
loans to countries that have trouble meeting their international payments and cannot otherwise
find sufficient financing. This financial assistance is designed to help countries restore
macroeconomic stability by rebuilding their international reserves, stabilising their currencies,
and paying for imports—all necessary conditions for re-launch growth.88

85
Wikipedia, Fixed exchange rate <http://en.wikipedia.org/wiki/Fixed_exchange_rate> at 16 October 2009.
86
James Boughton, ‘The IMF and the Force of History: Ten Events and Ten Ideas that Have Shaped the Institution’ (IMF
Working Paper WP/04/75, International Monetary Funds, 2004) 7.
87
Sarkar, above n 8, 10.
88
International Monetary Fund, About the IMF < https://www.imf.org/external/about/ourwork.htm> at 2 November 2009.
16
17
 International Monetary Fund (IMF) members
Afghanistan Algeria Argentina Australia Austria Azerbaijan, Bahamas, The Bahrain
Republic of
Bangladesh Barbados Belarus Belgium Belize Benin Bhutan Bolivia
Bosnia and Botswana Brazil Brunei Bulgaria Burkina Faso Burundi Cambodia
Herzegovina Darussalam
Cameroon Canada Cape Verde Central Chad Chile China Colombia
African
Republic
Comoros Congo, Congo, Costa Rica Côte d'Ivoire Croatia Cyprus Czech
Republic
Democratic Republic of
Republic of
the
Denmark Djibouti Dominica Dominican Ecuador Egypt El Salvador Equatorial
Republic Guinea
Eritrea Estonia Ethiopia Fiji Finland France Gabon Gambia, The
Georgia Germany Ghana Greece Grenada Guatemala Guinea Guinea-Bissau
Guyana Haiti Honduras Hungary Iceland India Indonesia, Iran, Islamic
Republic of
Iraq Ireland Israel Italy Jamaica Japan Jordan Kazakhstan
Kenya Kiribati Korea Kosovo Kuwait Kyrgyz Lao People's Latvia
Republic Democratic
Republic
Lebanon Lesotho Liberia Libyan Arab Lithuania Luxembourg Macedonia, Madagascar
Jamahiriya former
Yugoslav
Republic of
Malawi Malaysia Maldives Mali Malta Marshall Mauritania Mauritius
Islands
Mexico Micronesia, Moldova Mongolia Montenegro Morocco Mozambique, Myanmar
Federated Republic of
States of

Namibia Nepal Netherlands New Zealand Nicaragua Niger Nigeria Norway

Oman Pakistan Palau Panama Faso Papua New Paraguay Peru Philippines
Guinea
Poland Portugal Qatar Romania Russian Rwanda St. Kitts and St. Lucia
Federation Nevis
St. Vincent and Samoa San Marino São Tomé Saudi Arabia Senegal Serbia Seychelles
the Grenadines and
Príncipe
Sierra Leone Singapore Slovak Slovenia Solomon Somalia South Africa Spain
Republic Islands
Sri Lanka Sudan Suriname Swaziland Sweden Switzerland Syrian Arab Tajikistan
Republic
Tanzania Thailand Timor-Leste Togo Tonga Trinidad and Tunisia Turkey
Tobago
Turkmenistan Uganda Ukraine United Arab United United States Uruguay Uzbekistan
Emirates Kingdom
Vanuatu Venezuela, Vietnam Yemen, Zambia Zimbabwe
República Republic of
Bolivariana
de
18
 Section 6.4 World Bank Today
After the failure to achieve the primary gold of poverty alleviation World Bank therefore it has
been reformed. Mr. Robert B. Zoellick is the eleventh President of the World Bank Group since
2007. The Bank organizes its operations on a regional basis. A Vice President heads each of six
regions which are Africa, East Asia and Pacific, South Asia, Europe and Central Asia, Middle
East and North Africa, and Latin America and the Caribbean and which are responsible for all
operations in the borrowing countries within that region. 89

The World Bank has some 10,000 staff who works at its headquarters in Washington and in
over 100 country offices worldwide.90 Since the World Bank began operating, it has been
carrying over 10,000 projects and provides a wide variety of analytical and advisory service to
meet the development needs of individual countries and the international community such as
Productive Safety Net (APL III) project in Ethiopia, Third Basic Education Quality
Improvement Project in Uruguay, and Framework for Green Growth Project in Mexico.91

Section VII: European Snake in tunnel

After the collapse of the Bretton Woods in 1971, most of the EEC countries agreed in 1972 to
maintain stable exchange rates by preventing exchange fluctuations of more than 2.25%92 as
know as the European currency snake.

In the 1970s, the ‘snake in the tunnel’ was the first challenge of European monetary cooperation
which aimed at limiting fluctuations between different European currencies. It was an attempt at
creating a single currency band for the European Economic Community (EEC), essentially
pegging all the EEC currencies to one another.93 The EC member states established the snake in
April 1972. Denmark, UK and Ireland had been accepted for EC membership to protect
themselves from the currency situations. The arrangement of EEC were patterned after Bretton
89
The World Bank, World Bank Management- Management at the Country level <http://go.worldbank.org/7W4TE188W1> at 2
November 2009.
90
Ibid.
91
Bretton Woods Project, above n 1.
92
Icon Group International, Inc., Eec: Webster’s Facts and Phrases (revised ed, 2008).
93
Wikipedia, Snake in the tunnel, < http://en.wikipedia.org/wiki/Snake_in_the_tunnel> at 26 October 2009.
19
Wood were authorized to retain controls on capital movements and consistent with their
obligations to the IMF and the OECD.94

In the late 1960s and early 1970s, Europe was seriously weakened by the currency turmoil. The
joint effect of the deflation of the French franc, the upward revaluation of the German mark and
the collapse of the Bretton Woods International Monetary System destabilised European
markets. Furthermore, exchange rates between the currencies of the Member States had to be
fixed before a common market could be created. In 18 December 1971, The Smithsonian
Agreement was signed in Washington on behalf of German and France. France came around to
support the idea of Karl Schiller, the German minister for Finance and Economic Affair, to
resolve the crisis of finance stability. The new parities between dollar and European currencies
were set which also has known as the currency tunnel.95 However, in 1977, the president of the
European commission, Roy Jenkins put forward a new proposal for EMU after the EMU
couldn’t try to manage the currency stability properly with the participation of all Member
states’ currencies except the British pound which joined in 1990 and only stayed for two years.96

Section VIII: European Monetary System (EMS)

European Monetary System (EMS) was an arrangement established in 1979 under the Jenkins
European Commission where most nations of the European Economic Community (EEC) linked
their currencies to prevent large fluctuations relative to one another.97 EMS was performed very
well and more flexible than monetary under Bretton Wood system. For instance, The maximum
margin tolerated between two currencies in the system remained 2.25%, just as in the snake (6%
for the weaker currencies), but a currency's exchange rate fluctuations were no longer calculated
in relation to each of the other currencies in the system, but in relation to the European currency
unit. 98

In general, the EMS confirmed the meaning of the cooperative discipline framework which it
helped to establish. By obliging the countries, which were party to it, to comply with an explicit
94
Barry Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond (1st ed, 2007) 247-8.
95
Étienne Deschamps, The European currency snake’ European Navigator (Centre Virtuel de la Connaissance sur l'Europe
trans, 2006 ed) <http://www.ena.lu/european-currency-snake-020100278.html>.
96
European Commision, Phase 2: the European Monetary System
<http://ec.europa.eu/economy_finance/the_euro/road_to_emu9381_en.htm> at 2 November 2009.
97
Wikipedia, European Monetary System <http://en.wikipedia.org/wiki/European_Monetary_System> at 30 October 2009.
98
Nicolas Moussis, Access to European Union (18th ed, 2009) 120, 131.
20
exchange rate discipline, it made a decisive contribution in the fight against inflation.99 The
famous Bundesbank, German famous bank, was unable to guarantee of the discipline under
EMS. However, these discipline present good results until the end of the '80s, but, since 1990,
two important phenomena started eroding this discipline within the EMS: the complete
liberalisation of capital movements within the Community, which reinforced the speculative
capacity of financial intermediaries; and the cost of German reunification, which had resulted in
an increasing budgetary deficit in Germany.100 Without the stability of currency, none of
monetary system cooperation and the end of Bretton Wood system, and with all these lessons,
EMS members gained ability to organize the EMS and it’s even more useful but only needed
better mechanism.101

According to the EMS Agreement, participating central banks are entitled to hold only working
balances in other participating currencies, and these limits can only be exceeded with the
consent of the central bank concerned. This provision, however, has been applied flexibly. In
particular, the Deutsche Bundesbank, the issuer of the main EMS intervention currency, has
consented to other central banks holding substantial amounts of deutsche mark and, on occasion,
has encouraged them to acquire deutsche mark when market conditions made this appropriate.
During periods of strength of its currency, the Deutsche Bundesbank has at times been reluctant
to see large injections of its currency into the market as this may have been in conflict with its
own domestic monetary targets.102

Furthermore, at the beginning of 1999; the same EU members adopted a single currency, the
Euro, for foreign exchange and electronic payments. By then, European Union created a
common economic policy to help nations reduce debt and made a strong attempt at taming
inflation. In 2001, EU established the budget-deficit ceilings because of the growth of economic.
And the Euro coins and notes began circulating in 2002. The ECU was used as a unit of
accounting to determine exchange rates among the national currencies. In 2003, economic
downturns, France and Germany stayed in violation of the ceilings, temporarily suspended the
pact but later in 2004 the EU high court annulled the finance ministers’ decision. According to
the ECU, Denmark, Great Britain, and Sweden did not adopt the Euro. The most notable is
99
Ibid.
100
Ibid 132.
101
Ibid 132-3.
102
Ungerer, above n 2.
21
Britain, which continues to regard itself as more or less separate from Europe. In all three
nations there have been strong public concerns that dropping their respective national currencies
would give up too much independence. Danish voters rejected the Euro in a referendum in 2000.
The vote strengthened opposition to the Euro in Britain and Sweden. Of the 12 EU members
admitted since 2004, Slovenia, Malta, and Cyprus have adopted the Euro.103

Conclusion
By mid 1900s, the U.S. financial authorities had established the institutions, and procedures to
regulate the international monetary system of setting international standard to all nations to strict
the used of gold standard determining the value to a US currency. The Bretton Woods
agreement made the U.S currency to be better than any currency in the world and also give the
opportunities for deciding the direction and policy of the world’s economy. U.S. is also only
country that can has the balance of trade deficit by do not have to devaluation their currency.
The system was very successful in the short time because all nations reserve the U.S. dollars for
their country but after the distrust in the U.S. currency they are selling the currency and
exchange to gold or other currency. The system of Bretton Woods with its fixed exchange rates
does not exist anymore today. However, the Bretton Woods system and the International
Monetary System performed very well in the short period of time but after World War II, the
whole system had collapsed. After the Bretton Woods collapsed, the floating exchange rate
system operated instead of the fixed exchange rate.
The major points of the collapse of the Bretton Woods system were the connected between
problems. The way that U.S. manages by using macroeconomic policies is also the major
problem to create the breakdown of the system. The recession from the capital expense of doing
Vietnam War and many nations begin to recognise the emerging balance of payments and gold
market pattern specially the price of gold and dollar liabilities. The failed to responding a real
dollars depreciation to stop the persistent U.S. balance of payments and to develop a mechanism
for providing reserves that were not fix to the U.S. dollar and ultimately linked to a U.S. balance
of payments deficit. As the result in distrust of U.S. currency, many countries sell dollars to the
Federal Reserve for gold therefore; in this case, it likely to make U.S. currency reduce when

103
Columbia Electronic Encyclopedia, European Monetary System <http://www.infoplease.com/ce6/history/A0817895.html> at
2007.
22
compare with pure gold. But, the government at that time does not want to devaluation,
therefore they are continue running imbalanced a deficit then it cause the value of U.S currency
continuously drop. Therefore, in 1971s the U.S. announced the revoke of exchanging the
currency into pure gold and then the Bretton Woods had come to an end of its system.

Soon after the fail of Bretton Woods system, The European countries were agreed to maintain
stable exchange rates by preventing exchange fluctuations. They performed as a group to
compete with outside currencies including the dollar. The European Monetary System (EMS)
was established with the European Currency Unit (ECU) to launch as a bridge to help the lead
the ultimate goal of Economic and Monetary Union (EMU). The currency of Japan and most of
European nations were floating against dollar and shortly it became to be a new system in
international monetary relations.104

The roles of IMF and World Bank today are similar to the previous roles under Bretton Wood
system. IMF continues to loan foreign currencies to members for their shortage of money, when
a rapid tightening of monetary or fiscal policy would hurt domestic employment. The World
Bank is also remains as the primary financier of development projects in the Third World, with
offices located around 100 countries across the world.

The IMS under Bretton Woods system no longer exists. However, the IMF and the World Bank
remain to help the developing countries. With this fact in mind it is easy to understand how
various countries have advanced their living standards, policies, and economies.

Assessment of the system for contemporary for financial global environment

The financial global environment is about the choices we make and the way we carry them out.
Many scholars and politicians have called for strengthening the global environmental financial
system by transforming IMF and World Bank into a more influential global environmental
organization. In this paper, I examine how the Bretton Woods System has performed under IMF
and World Bank in terms of delivering results according to its mandate as the leading institution
for global financial theory and analyse the implications for reform of the system as demanded
by the US and EU. I have identified a set of core structural factors that resulted from a historical

104
Krugman and Obstfeld, above n 3, 509.
23
compromise between the performance of IMF and World Bank at the time of Bretton Woods.
Yet, their impacts on effectiveness, efficiency, and equity are critical. I have sought to
understand the compromises of the International monetary system and have learnt that the
system was performed in the short period of time.

However, it is clear that the world economic order created by the international monetary
institutions such as the IMF and World Bank is sufficient to manage world’s economy. The
Bretton Woods system will be better if we learn from our lesson in the past and adapt or
improve that theory to be relate to presently. According to the experience, it shows that national
governments would not be willing to maintain both free trade and fixed exchange rates at the
price within single economy.105 In the future, the need to improve of the Bretton Woods system
should combine international cooperation between developing and developed nations. The
monetary institutions such as IMF and World Bank should improve to support more in
developing countries for protecting inflation from economic circumstance. The fixed economy
made it difficult for countries to manage simultaneous internal and external balance without
discrete exchange rate adjustment. Consequently, the policy-maker have to learn from the past,
what the problem, why is it failed, what should be done to improve and then manage to adapt
the policies to ensure that the next Bretton Woods system will be achieve or successful in the
long-term goal and should not fix the currency within single economy. Otherwise, the new
Bretton Woods will come to an end again.

Word: 6,576

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28