Forex: The Bretton Woods Agreement
No country can manipulate its exchange rate, or introduce exchange rate control, without affecting other countries immediately and materially. Foreign exchanges, therefore, should be an obvious field of international co-operation. with the exception of the Tripartite agreement of 1936, the interwar period did not bring forth a constructive co-ordination of the different national monetary policies. The Bretton Woods agreement, Which took place in New Hampshire (in July 1944), concerning the creation of International Monetary Fund, marked the first concerted effort to substitute international monetary co-operation for such beggar-my-neighbor policies as competitive exchange depreciation, or exchange control. The International Monetary Fund is a logical development of the national stabilization funds. Under it, as proposed, the members pay into the fund gold and national currencies, and the funds sell to the members' foreign exchanges, and are no longer tempted to resort to measures destructive towards international prosperity. The fund wants to promote stable exchange rates but the exchange rates of the members (expressed in gold parities) can be altered with the permission of the fund when a change is necessary to correct a fundamental disequilibrium. However, this problem has existed throughout the postwar attempt to allow countries to change their exchange rates--- only when disequilibrium is fundamental. This permitted exchange rate adjustment within limitations. The fund uses gold as a common denominator for the member currencies and as an asset of highest international liquidity. But, as stated above, the member currencies are not rigidly tied to gold nor are the economies of the member countries subject to the adjustment mechanism which, under the gold standard, led to contraction and unemployment. Exchange control will be permitted only in very special cases and under safeguards which will prevent its deterioration into a dangerous instrument of commercial policy. The International Monetary Fund, as proposed in the Bretton Woods agreement, attempts to achieve the maximum amount of integration of the monetary policies of the members, which is attainable without coercion. It makes, therefore, an effort towards exchange stability which is superior to the automatic working of the gold standard mechanism. If the fund succeeds in this, it would resolve most of the difficulties which endanger an international monetary system in the modern world. The distribution of gold as international money is determined by who earns it by export surpluses. Gold producers run import surpluses, balanced by new gold production, which may properly be regarded as commodity exports. When gold leaves their shores it is monetary gold, available to the countries that provide goods in exchange.
