An Aspect Of The Bretton Woods Agreement Was A Commitment Not To Use
Another aspect of the internationalization of the banking system has been the emergence of international banking consortia. Since 1964, several banks had formed international trade unions and, by 1971, more than three-quarters of the world`s largest banks had become shareholders in these unions. Multinational banks can and do huge international capital transfers not only for investment purposes, but also to protect and speculate against exchange rate fluctuations. On the other hand, after the creation of Bretton Woods, where the United States produced half of its manufactured goods and held half of its reserves, the two charges of international management and the Cold War could first cope with the double burdens of international leadership and the Cold War. During the 1950s, Washington maintained a balance-of-payments deficit to finance credit, aid and troops for allied regimes. But in the 1960s, costs became less bearable. Until 1970, the United States held less than 16% of international reserves. Adjusting to these changes in reality has been hampered by the U.S. fixed exchange rate requirement and the U.S.
requirement to convert the dollar into gold on demand. The IMF has attempted to provide for exchange rate adjustments from time to time (a change in the face value of a member) by an international agreement. Member States have been allowed to adjust their exchange rates by 1%. This trend has been to restore the balance of trade by increasing exports and reducing imports. This would only be permissible if there was a fundamental imbalance. A depreciation of a country`s money was described as a devaluation, while an increase in the value of the country`s money was described as an appreciation. There is no provision in the agreement for the establishment of international reserves. It expected that a new gold production would suffice. In the event of a structural imbalance, it expected national solutions, such as adjusting monetary value or improving a country`s competitive position by other means. However, the IMF had few resources to promote such national solutions. b) The Federal Reserve system has concluded a series of monetary sweaas agreements with central banks in Western Europe, Canada and Japan.
Under these bilateral agreements, a foreign central bank granted reserve loans (in foreign currencies) to the Federal Reserve system in exchange for an equal amount of reserve credits (in dollars). One example is the Gold Pool, created in 1961 by the United States and seven European countries under the gold dollar standard of the Bretton Woods system. The agreement aimed to stabilize the price of gold in dollars to avoid the depletion of U.S. gold reserves. Like the current issue of the accumulation of reserve requirements, this is an example in which the individual and collective interests of central banks differ. Arbitration transactions by some central banks were individually rational, but collectively undesirable: they reduced U.S. gold reserves and called into question the U.S. obligation to trade gold for the fixed-price dollar. The Gold Pool wanted to avoid this depletion of U.S.
gold reserves by pushing the market price to the official price. This cooperation worked as long as the market price fell below the official price and the pool was a net buyer of gold. However, when the market price went up and the pool sold gold for dollars, the arrangement collapsed. Some central banks left the pool or traded — they bought gold when the pool sold gold.5 The only currency strong enough to meet the growing demands of international money transactions was the U.S. dollar. The strength of the U.S. economy, the strong relationship of the dollar with gold ($35 per ounce) and the U.S. government`s commitment to convert the dollar to gold at this price have made the dollar as good as gold. In fact, the dollar was better than gold: it earned interest and was more flexible than gold.