BRETTON WOODS

As World War II came to an end, an international monetary conference was held in July 1944 at the Mount Washington Hotel in Bretton Woods, New Hampshire. More than seven hundred people from 44 countries came to this small mountain resort to construct a workable international monetary system. As is typically the case with such conferences, the plan had been drafted by a few experts and largely accepted beforehand by the principal nations. In this case, England and the United States were the most important participants, and the primary architects were the English economist John Maynard Keynes and an Assistant Secretary of the U.S. Treasury, Harry D. White.

The Bretton Woods agreement attempted to restore fixed exchange rates without the domestic disruption caused by the classic gold standard. The partic­ipating nations agreed to make whatever currency transactions were necessary to keep exchange rates within 1 percent of the initial fixing. In exceptional circumstances, a nation would be permitted a one-time devaluation of up to 10 percent.

A central reserve fund, the International Monetary Fund (IMF), was established to lend money to nations that needed to purchase their currency in order to support its value. Instead of the deflationary shock inflicted by the pure gold standard, these loans would give a nation time to take gradual steps to strengthen its currency; an escalation of the fees on these loans was intended to discourage procrastination. The central reserve fund — $6.8 billion in gold, U.S. dollars, and other strong currencies — was financed by contributions from the members, principally the United States and Britain. The IMF was given a home in Washington, D.C, and a staff to administer the reserve fund and to advise and prod nations with weak currencies.

Under the original rules of the Fund, a member nation could borrow no more than 25 percent of its quota in any one year, up to a total of 125 percent of its quota over a five-year period. The nation could borrow the first 25 percent of its quota, the gold tranche, almost automatically, without any restrictions or conditions. For further borrowings (in subsequent years), the credit tranche, the Fund charged higher and higher interest rate and imposed more and more supervision and conditions to ensure that the deficit nation was taking appropriate measures to eliminate the deficit. If the Fund’s holding of a nation’s currency fell below 75 percent of its quota, the nation could borrow the difference from the Fund without having to repay its loan. This was called super gold tranche.

Like a doctor called in at the last minute, the IMF is often asked to resuscitate ailing economies. This ‘structural adjustment’ process is a crucial first step before receiving development assistance from other sources. Acceptance of the IMF plan is usually seen as a sign that a nation is prepared to seriously address its economic illnesses, paving the way for long-term funding from the World bank and other sources.

The economic medicine prescribed by the IMF is often painful. For example, it often calls for debtor governments to reduce subsidies to failing state industries and insists on strict anti-inflationary measures such as increasing the prices of basic goods and services. During the difficult restructuring processes, the IMF often provides temporary ‘standby’ loans to keep the country afloat until more long-term funding can be arranged.

Borrowing from the Fund was restricted to cover temporary balance-of-payments deficits and to be repaid within three to five years so as not to tie up the Fund’s resources in long-term loans. Long-run development assistance was to be provided by the International Bank for Reconstruction and Development (IBRD or World Bank) and its affiliates, the International Development Association (established in 196o to make loans at subsidized rates to the poorer developing nations) and the International Finance Corporation (established in 1956 to stimulate private investments in developing nations from indigenous and foreign sources).

The major role of the World Bank is to provide a helping hand to countries in need. Its first activity was to channel funds from the USA and other nations into rebuilding Europe after World War II. The World Bank now provides most of its loans to countries in the Third World, and receives a significant portion of its funding from the now wealthy nations it was initially designed to assist.

Like the regional development banks, the World bank receives its funds from its rich member countries, which in turn provide it with the credit to borrow cheaply on the world’s capital markets. This allows the World Bank to provide these funds at extremely favorable rates to needy countries.

In 1970, the IMF expanded its reserve base even further by creating "paper gold," Special Drawing Rights (SDRs), which are credited to members and can be used within the IMF to purchase hard currency. The SDR was initially valued at one U.S. dollar. Since 1974, the SDR's value relative to the dollar has been determined by a weighted average of the exchange rates of 16 countries relative to the dollar. The value of the SDR rose to $1.30 in 1980 (as the dollar weakened), fell to $0.96 in 1985 (as the dollar strengthened), and then rose to $1.38 in 1988.

These SDRs have enlarged the IMF’s pool of funds that can be lent to governments. They are also a tentative first step toward an international money, with the IMF as the international central bank. It has been proposed that the IMF raise funds by selling SDR-denominated securities and that SDRs be used by central banks as a multicurrency reserve. Although SDRs are not now traded privately, in 1980 Chemical Bank pioneered international securities with values indexed to SDRs. These are intended to reduce exchange-rate risks for interna­tional banks and businesses.

1. Write a short summary of the text in Russian. Exchange the texts with your partner and translate them into English.

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