Background on the Bretton Woods Institutions

Stability in the international economy is a prerequisite Ior worldwide peace and prosperity. It
was Ior this reason that at the end oI World War 2 representatives Irom several countries met
at Bretton Woods in Hampshire and Iormed both the International Monetary Fund and the
World Bank.The creation oI the World Bank and the IMF came at the end oI the Second
World War. They were based on the ideas oI a trio oI key experts - US Treasury Secretary
Henry Morganthau, his chieI economic advisor Harry Dexter White, and British economist
John Maynard Keynes.
They wanted to establish a postwar economic order based on notions oI consensual decision-
making and cooperation in the realm oI trade and economic relations. It was Ielt by leaders oI
the Allied countries, particularly the US and Britain, that a multilateral Iramework was
needed to overcome the destabilising eIIects oI the previous global economic depression and
trade battles.
The Bretton Woods Institutions are the World Bank, and the International Monetary Fund
(IMF). They were set up at a meeting oI 43 countries in Bretton Woods, New Hampshire,
USA in July 1944. Their aims were to help rebuild the shattered postwar economy and to
promote international economic cooperation. The original Bretton Woods agreement also
included plans Ior an International Trade Organisation (ITO) but these lay dormant until the
World Trade Organisation (WTO) was created in the early 1990s.
The Bretton Woods system is commonly understood to reIer to the international monetary
regime that prevailed Irom the end oI World War II until the early 1970s. Taking its name
Irom the site oI the 1944 conIerence that created the *International Monetary Fund (IMF) and
*World Bank, the Bretton Woods system was history's Iirst example oI a Iully negotiated
monetary order intended to govern currency relations among sovereign states. In principle,
the regime was designed to combine binding legal obligations with multilateral decision-
making conducted through an international organization, the IMF, endowed with limited
supranational authority. In practice the initial scheme, as well as its subsequent development
and ultimate demise, were directly dependent on the preIerences and policies oI its most
powerIul member, the United States.
The World Bank and its sister organization, the International Monetary Fund were reIerred to
as the Bretton Woods Institutions or BWIs. The International Monetary Fund and the World
Bank group were created to assist nations in becoming and remaining economically viable.
According to Cateora, 2002 each plays an important role in the environment oI international
trade by helping to maintain stability in the Iinancial markets and by assisting countries that
are seeking economic development and restructuring.
iscuss the role of the Bretton Woods institutions on the global monetary system.
International Monetary Fund



The IMF is an international organization oI 185 member countries. It
was established to promote international monetary cooperation,
exchange stability, and orderly exchange arrangements; to Ioster
economic growth and high levels oI employment; and to provide
temporary Iinancial assistance to countries to help ease balance oI
payments adjustment. Since the IMF was established its purposes have
remained unchanged but its operationswhich involve surveillance,
Iinancial assistance, and technical assistance have developed to meet the
changing needs oI its member countries in an evolving world economy.
http://www.imf.org/


%he purpose of the Fund is to:
i. Promote international monetary cooperation through consultation and collaboration.
ii. Facilitate the expansion and balanced growth oI international trade and so contribute to the
promotion and maintenance oI high levels oI employment and real income.
iii. Promote exchange stability and orderly exchange arrangements.
iv. Assist in the establishment oI a multilateral system oI payments and the elimination oI
Ioreign exchange restrictions.
v. Assist members through temporary provision oI Iinancial resources to correct
maladjustments in their balance oI payments.
The International Monetary Fund (IMF) is the central institution oI the international monetary
system. It has two main roles ie it monitors the economic policies oI all the member countries
and providing policy advice. It also provides Iinancial assistance to members Iaced with
balance oI payments problems. These loans are disbursed on the condition that debtor
countries adhere to the IMF's economic advice, generally known as Structural Adjustment
Programmes.The rules oI the institution, contained in the IMF's Articles oI Agreement signed
by all members, constitute a code oI conduct. The code is simple: it requires members to
allow their currency to be exchanged Ior Ioreign currencies Ireely and without restriction.
To keep the IMF inIormed oI changes they contemplate in Iinancial and monetary policies
that will aIIect Iellow members' economies, and, to the extent possible, to modiIy these
policies on the advice oI the IMF to accommodate the needs oI the entire membership. To
help nations abide by the code oI conduct, the IMF administers a pool oI money Irom which
members can borrow when they are in trouble. The IMF is not, however, primarily a lending
institution as is the Bank. It is Iirst and Ioremost an overseer oI its members' monetary and
exchange rate policies and a guardian oI the code oI conduct. In addition to assisting its
members in this way, the IMF also helps by providing technical assistance in organizing
central banks, establishing and reIorming tax systems, and setting up agencies to gather and
publish economic statistics.
The IMF is also authorized to issue a special type oI money, called the SDR, to provide its
members with additional liquidity. The IMF developed special drawing rights (SDRs) to cope
with universally Iloating exchange rates.(Cateora ,2002)states that the SDR is in eIIect paper
gold` and represents an average base oI value derived Irom the value oI a group oI major
currencies. Known technically as a Iiduciary asset, the SDR can be retained by members as
part oI their monetary reserves or be used in place oI national currencies in transactions with
other members.
The IMF also plays an important role in providing short term Iinancing to governments
struggling to pay current account debts. Cateora , 2002 Iurther alludes that the IMF lessened
the Iinancial crisis that had hit several Asian countries namely Thailand, Indonesia, and South
Korea. Had these countries not received aid the crisis would have resulted in a global
recession. Hence it is clear that IMF plays a critical role in the global monetary system.
%he World Bank

The World Bank is a vital source oI Iinancial and technical assistance to
developing countries around the world. The World Bank is not a bank in the
common sense. It is made up oI two unique development institutions owned
by 185 member countriesthe International Bank Ior Reconstruction and
Development (IBRD) and the International Development Association (IDA).
Each institution plays a diIIerent but supportive role in the Bank's mission oI
global poverty reduction and the improvement oI living standards. The
IBRD Iocuses on middle income and creditworthy poor countries, while IDA
Iocuses on the poorest countries in the world. Together the Bank provides
low-interest loans, interest-Iree credit and grants to developing countries Ior
education, health, inIrastructure, communications and many other purposes.
(http://www.worldbank.org)

The World Bank's primary mandate is poverty alleviation. Originally created to Iinance the
reconstruction oI war-torn Europe, the World Bank has become the primary Iinancier oI
development projects in the Third World and has also become the Third World's largest
creditor. The World Bank is currently the largest multi-national lending and technical agency
dealing with Third World development. As the world's leading development agency, the
World Bank has a wide-ranging mandate, Irom consolidating loans Ior large-scale
development projects to providing structural adjustment loans and sectoral adjustment loans
to developing countries experiencing balance oI payments problems.



%he International Monetary Fund and the World Bank at a Glance
International Monetary Fund
O oversees the international monetary
system
O promotes exchange stability and
orderly exchange relations among its
member countries
O assists all members--both industrial
and developing countries--that Iind
themselves in temporary balance oI
payments diIIiculties by providing
short- to medium-term credits
O supplements the currency reserves oI
its members through the allocation oI
SDRs (special drawing rights
O draws its Iinancial resources
principally Irom the quota
subscriptions oI its member countries
O has a staII oI 2,300 drawn Irom 182
member countries
World Bank
O seeks to promote the economic
development oI the world's poorer
countries
O assists developing countries through
long-term Iinancing oI development
projects and programs
O provides to the poorest developing
countries whose per capita GNP is
less than $865 a year special Iinancial
assistance through the International
Development Association (IDA)
O encourages private enterprises in
developing countries through its
aIIiliate, the International Finance
Corporation (IFC)
O acquires most oI its Iinancial
resources by borrowing on the
international bond market
O has a staII oI 7,000 drawn Irom 180
members

Impact on international marketing
Cateora (2005) deIines Iloating exchange rates as changes in market demand and market
supply oI a currency which causes a change in value. The Bretton Woods Institutions have
helped to control currencies and exchange rates. This reduced risks Ior companies that deal
with large quantities oI Ioreign currencies. Depending on the time span a company can suIIer
a substantial loss Irom too many Iluctuations oI the currencies. The Iloating exchange rates
have Iorced marketers to be especially aware oI the exchange rate Iluctuations and the extent
oI their transaction exposure. The MNC has to then reduce its exchange rate risk with the use
oI various methods such as demanding payment in the home country currency though this is
not always possible.
The Bretton Woods ConIerence led to the establishment oI the IMF and the IBRD, which still
remain powerIul Iorces in the world economy. This has helped all countries to have
governing bodies on the international Iront as they have lending institutions Ior the diIIerent
groups oI countries. As a result oI the establishment oI agreed upon structures and rules oI
international economic interaction, conIlict over economic issues was minimized, and the
signiIicance oI the economic aspect oI international relations seemed to recede