The Bretton Woods Agreement: IMF & World Bank Explained

[00:00:00]hello everyone welcome to business school 101 when we learn the international monetary system the bretton woods agreement is an important topic that cannot get around the bretton woods agreement was negotiated in july 1944 by delegates from 44 countries at the united nations monetary and financial conference held in bretton woods an area within the state of new hampshire united states the agreement not only was the first example of a fully negotiated monetary order intended to govern monetary relations among independent countries but also created two important global financial institutions the world bank and the international monetary fund so why the world need to negotiate this agreement and establish these financial institutions what are their major missions why they are so important to the international monetary market in this video i will answer these questions for you section one the background before world war one most countries were on the gold standard which means each country guaranteed that it would redeem its currency for its value in gold the gold standard worked reasonably well from the 1870s until the start of world war 1 in 1914 when it was abandoned during the war several governments financed part of their massive military expenditures by printing money this resulted in inflation and by the war's end in 1918 price levels were higher everywhere the united states returned to the gold standard in 1919 great britain in 1925 and france in 1928 great britain returned to the gold standard by pegging the pound to gold at the pre-war gold parity level of 4 pounds and 25 pence per ounce despite substantial inflation between 1914 and 1925 this priced british goods out of foreign markets which pushed the country into a deep depression when foreign holders of pounds lost confidence in great britain's commitment to maintaining its currency's value they began converting their holdings of pounds into gold the british government saw that it could not satisfy the demand for gold without seriously depleting its gold reserves so it suspended convertibility in nineteen thirty one the united states followed suit and left the gold standard in 1933 but returned to it in 1934 raising the dollar price of gold from twenty dollars and sixty seven cents per ounce to thirty five dollars per ounce since more dollars were needed to buy an ounce of gold than before the implication was that the dollar was worth less this effectively amounted to a devaluation of the dollar relative to other currencies thus before the devaluation the pound dollar exchange rate was one pound equals to four dollars and 87 cents but after the devaluation it was one pound equals to eight dollars and 24 cents by reducing the price of u.s exports and increasing the price of imports the american government was trying to create employment in the united states by boosting output however a number of other countries adopted a similar tactic and in the cycle of competitive devaluations that soon emerged no country could win the net result was the shattering of any remaining confidence in the system with countries devaluing their currencies at will one could no longer be certain how much gold a currency could buy instead of holding on to another country's currency people often tried to change it into gold immediately lest the country devalue its currency in the intervening period this put pressure on the gold reserves of various countries forcing them to suspend gold convertibility by the start of world war ii in 1939 the gold standard was dead therefore the world need a new monetary system to rebuild the international monetary order section 2 the establishment in 1944 at the height of world war ii representatives from 44 countries met at bretton woods new hampshire to design a new international monetary system with the collapse of the gold standard and the great depression of the 1930s fresh in their minds these statesmen were determined to build an enduring economic order that would facilitate post-war economic growth there was consensus that fixed exchange rates were desirable in addition the conference participants wanted to avoid the senseless competitive devaluations of the 1930s and they recognized that the gold standard would not assure this the major problem with the gold standard as previously constituted was that no multinational institution could stop countries from engaging in competitive devaluations though the bretton woods conference itself took place over just three weeks the preparations for it had been going on for several years the primary designers of the bretton woods system were the famous british economist john maynard keynes an american chief international economist of the u s treasury department harry dexter white keynes's hope was to establish a powerful global central bank to be called the clearing union and issue a new international reserve currency called the banker white's plan envisioned a more modest lending fund and a greater role for the us dollar rather than the creation of a new currency in the end the adopted plan took ideas from both leaning more toward white's plan the agreement reached at bretton woods established two multinational institutions the international monetary fund or imf and the world bank the task of the imf would be to maintain order in the international monetary system and that of the world bank would be to promote general economic development the bretton woods agreement also called for a system of fixed exchange rates that would be policed by the imf under the agreement all countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold only the dollar remained convertible into gold at a price of 35 dollars per ounce each country decided what it wanted its exchange rate to be vis-a-vis the dollar and then calculated the gold par value of the currency based on that selected dollar exchange rate another aspect of the bretton woods agreement was a commitment not to use devaluation as a weapon of competitive trade policy it wasn't until 1958 that the bretton woods system became fully functional once implemented its provisions called for the u s dollar to be pegged to the value of gold moreover all other currencies in the system were then pegged to the u s dollars value section three the collapse in 1971 concerned that the us gold supply was no longer adequate to cover the number of dollars in circulation president nixon devalued the us dollar relative to gold after a run on gold reserve he declared a temporary suspension of the dollar's convertibility into gold by 1973 the bretton woods system had collapsed countries were then free to choose any exchange arrangement for their currency except pegging its value to the price of gold for example they could link its value to another country's currency or a basket of currencies or simply let it float freely and allow market forces to determine its value relative to other countries currencies although it collapsed the bretton woods agreement remains a significant event in world financial history the international monetary fund and the world bank played an important part in helping to rebuild europe in the aftermath of world war two subsequently both institutions have continued to maintain their founding goals while also transitioning to serve global government interests in the modern day so let's briefly introduce those two organizations section 4 the world bank the world bank is the collective name for the international bank for reconstruction and development or ibrd and the international development association or ida the ibrd provides loans at market rates of interest to middle-income developing countries in creditworthy lower-income countries the ida founded in 1960 provides interest-free long-term loans technical assistance and policy advice to low-income developing countries in areas such as health education and rural development whereas the ibrd raises most of its funds on the world's capital markets the ida's lending operations are mainly financed through contributions from developed countries headquartered in washington dc united states the world bank currently is staffed by more than ten thousand people roughly one fourth of whom are posted in developing countries it is run by a president and 25 executive directors as well as 29 various vice presidents it has more than 100 offices in member countries and in many countries staff members serve directly as policy advisers to the ministry of finance and other ministries the bank has consultative as well as informal ties with the world's financial markets and institutions and maintains links with non-governmental organizations in both developed and developing countries within the ibrd as of 2022 the us japan china germany and the uk have the most voting power the voting power is based on a country's capital subscription which is based in turn on its economic resources typically the wealthier and more developed countries constitute the bank's major shareholders and thus exercise greater power and influence for example in the early 21st century the united states exercised nearly one-sixth of the votes in the ibrd because developing countries hold only a small number of votes the system does not provide a significant voice for these countries which are the primary recipients of world bank loans and policy advice since it is established the world bank provided numerous interest free long-term loans technical assistance and policy advice to low-income developing countries in areas such as health education and rural development for example in april 2016 the world bank approved the national immunization support project for pakistan this project costing an estimated 377.41 million dollars aimed to increase the equitable distribution of vaccines to children ages 0 to 23 months section 5 the international monetary fund the international monetary fund or imf is an international financial institution also headquartered in washington dc united states consisting of 190 countries its stated mission 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 generally the imf used the following three primary methods to achieving its missions first surveillance the imf collects massive amounts of data on national economies international trade and the global economy in aggregate the organization also provides regularly updated economic forecasts at the national and international levels these forecasts published in the world economic outlook are accompanied by lengthy discussions on the effect of fiscal monetary and trade policies on growth prospects and financial stability second capacity building the imf provides technical assistance training and policy advice to member countries through its capacity building programs these programs include training in data collection and analysis which feed into the imf's project of monitoring national and global economies third lending the imf makes loans to countries that are experiencing economic distress to prevent or mitigate financial crises members contribute the funds for this lending to a pool based on a quota system quotas are reviewed every five years and are based on each country's wealth and economic performance which means the richer the country the larger its quota the quotas form a pool of loanable funds and determine how much money each member can borrow and how much voting power it will have for example the united states approximately 83 billion dollar contribution is the most of nimf member accounting for approximately 17 percent of total quotas accordingly the united states receives about 17 percent of the total votes on both the board of governors and the executive board the imf has had many successes and failures over its history here are two examples first jordan jordan had been impacted by its wars with israel civil war and a major economic recession in 1989 the country struggled with a high unemployment rate and an inability to pay its loans the country agreed to a series of five-year reforms that began with the imf the gulf war and the return of 230 000 jordanians because of iraq's invasion of kuwait put a strain on the government as unemployment continued to increase in the period from 1993 to 1999 the imf gave jordan three extended fund facility loans as a result the government undertook massive reforms of privatization taxes foreign investment and easier trade policies by 2000 the country was admitted to the world trade organization and one year later signed a free trade accord with the united states jordan was also able to bring down its overall debt payment and restructure it at a manageable level jordan is an example of how the imf can foster strong and stable economies that are productive members of the global economy second tanzania in 1985 the imf came to tanzania with the aim of turning a broke indebted socialist state into a strong contributor to the world economy the first steps taken were to lower trade barriers cut government programs and sell state-owned industries by 2000 the once-free health care industry started charging patients and the aids rate in the country shot up to eight percent the education system that was once free started to charge children to go to school and school enrollment which was at 98 percent in 1981 dropped to 66 percent in 2000 as a result the illiteracy rate of the country increased by nearly 50 percent this is an example of how the imf failed to understand that a one-size-fits-all strategy does not apply to all countries notwithstanding the imf continued its efforts to provide tanzania with various types of assistance and over time the nation achieved some success in different areas the annual inflation rate went from a high of 37.9 percent in 1994 to 4.1 percent in 2004. simultaneously real gross domestic product or gdp grew from 1.6 in 1994 to seven point four percent in two thousand four all right that's all for today's topic so how do you think about the bretton woods agreement world bank and international monetary fund please leave your thoughts in a comment below i hope that you guys have enjoyed this video and if you did make sure you give it a thumbs up and subscribe to my channel thanks for watching and i will see you next time