The functioning of Bretton Woods System

The functioning of Bretton Woods System

The functioning of Bretton Woods System In theory, the reserve currency would be the bancor (a World Currency Unit that was never implemented), proposed by John Maynard Keynes; however, the United States objected and their request was granted, making the "reserve currency" the U.S. dollar. This meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. The functioning of Bretton Woods System Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system. Meanwhile, to bolster confidence in the dollar, the U.S. agreed separately to link the dollar to gold at the rate of $35 per ounce.  

At this rate, foreign governments and central banks could exchange dollars for gold. Bretton Woods established a system of payments based on the dollar, which defined all currencies in relation to the dollar, itself convertible into gold, and above all, "as good as gold" for trade. The functioning of Bretton Woods System U.S. currency was now effectively the world currency, the standard to which every other currency was pegged. As the world's key currency, most international transactions were denominated in U.S. dollars. The functioning of Bretton Woods System the U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Additionally, all European nations that had been involved in World War II were highly in debt and transferred large amounts of gold into the United States, a fact that contributed to the supremacy of the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system. The functioning of Bretton Woods System Member countries could only change their par value by more than 10% with IMF approval, which was contingent on IMF determination that its balance of payments was in a "fundamental disequilibrium". The formal definition of fundamental disequilibrium was never determined, leading to uncertainty of approvals and attempts to repeatedly devalue by less than 10% instead. Any country that changed without approval or after being denied approval was denied access to the IMF.

b) Explain various International Commodity Agreements. 

An international commodity agreement is an undertaking by a group of countries to stabilize trade, supplies, and prices of a commodity for the benefit of participating countries. An agreement usually involves a consensus on quantities traded, prices, and stock management. A number of international commodity agreements serve solely as forums for information exchange, analysis, and policy discussion. USTR leads United States participation in two commodity trade agreements: the International Tropical Timber Agreement and the International Coffee Agreement (ICA). Both agreements establish intergovernmental organizations with governing councils . 

The International Coffee Organization (ICO) is the main intergovernmental organization for coffee. ICO exporting members account for more than 97 percent of world coffee production, and its importing Members, are responsible for around 80 percent of world coffee consumption. The functioning of Bretton Woods System The ICO makes a practical contribution to the world coffee economy and to the improvement of living standards in developing countries by facilitating intergovernmental consultation and coordination regarding coffee policies and priorities, by encouraging a sustainable world coffee economy, by initiating coffee development projects to add value and improve marketing, by increasing world coffee consumption through innovative market development activities, by promoting the improvement of coffee quality, by working closely with the global coffee industry through a 16-member Private Sector Consultative Board, and by ensuring transparency in the coffee market with objective and comprehensive information on the world coffee sector by means of statistics and market studies. 

The United States led recent efforts to renegotiate the ICA, and the text of the seventh International Coffee Agreement (ICA 2007) was adopted by the International Coffee Council on September 28, 2007. The new ICA is designed to enhance the ICO's role as a forum for intergovernmental consultations, to increase its contributions to meaningful market information and market transparency, and to ensure that the organization plays a unique role in developing innovative and effective capacity building in the coffee sector. The functioning of Bretton Woods System Among the features of the new agreement is a first-ever "Consultative Forum on Coffee Sector Finance" to promote the development and dissemination of innovations and best practices that can enable coffee producers to better manage financial aspects of the inherent volatility and risks associated with competitive and evolving markets. Other notable changes include expanding the organization's work in providing relevant statistical and market information and strengthening efforts to develop, review and implement capacity building projects that are particularly important to small-scale farmers in key developing country trading partners.

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