Lessons learned from Bretton Woods financial regulation

The Bretton Woods system

The Bretton Woods system was used to govern the value of money across countries by allowing a country to adopt a monetary policy that fixed its currency exchange rate. During the era, the United States eventually depended on regulations and controls as a plan to prevent all private investors from migrating from the dollar-dominated to the international as well as short-selling dollars (Fukumoto, 2011). It is also important to mention that Bretton Woods was a contract between the world's main creditor nation, the United States, and the world's most major debtor, Great Britain, and their policies had a considerable financial stability during that period. There was an overvaluation of the U.S. dollar's fixed value under a fixed exchange rate international monetary system.

Worldwide monetary expansion and rising inflation

These arrangements between the US and Europe led to worldwide monetary expansion and henceforth rising inflation and booms in commodity prices (Till, 2014). As a result of the threat of inflation, many countries such as Germany to tighten the monetary policy. Trade frictions may grow in consequence. Woods financial regulations, therefore, made a shift or change from the tacit and convention-based cooperation of the central bankers to rule-based, sweeping and multilateral co-operation among different states (Clifton, Díaz-Fuentes & Lanthier, 2014). The system was a remarkable achievement of the global coordination through the creation of World Bank and International Monetary Fund (IMF). Many nations have come to realise that the decision was not particularly helpful for the successful functioning of the new developments and efficient operation of the monetary system as there were several new realisations.

Achievement and challenges of Bretton Woods

Bretton Woods conference participants aimed at having an expanded international trade, investment and notable macroeconomic performance. The primary concern was to shape the world's financial system. Hence, under the gold exchange standard countries had to deflate domestic economy when faced with deficits. The system exerted enormous pressure on the US despite a decline in gold reserves and erosion of confidence that was given to the dollar (Helleiner, 2010). However, the national monetary and fiscal policy of the United States was free from external economic pressures despite the fact that it was running deficits in its balance of payments to achieve international liquidity.

Political risks and difficulties in freely choosing exchange arrangement

Governments, therefore, faced great political risks due to adjustments of parities that eventually led to lack of trust accompanied by destabilising speculations (Widmaier, 2014). It implies that before the collapse of Bretton Woods regime, IMF members faced difficulties in freely choosing any kind of exchange arrangement apart from pegging the currency to gold and participation in the currency bloc. Wealthier nations could absorb costs resulting from increased oil prices while underdeveloped countries continued to experience balance of payment issues which provoked the aim of the regime of post-war reconstruction and economic growth and prosperity worldwide.

Creation and maintenance of an order

Apart from the fact that years of Bretton Woods agreement were a period of the international and global order, there was a revelation of inherent difficulties creation and maintenance of an order that could pursue unfettered and free trade together with free policy goals for different nations. Furthermore, field exchange rates and gold standard discipline was too much for the economies that proliferated at varying levels of global competitiveness (Till, 2014). Therefore, the regime was a transitional stage as there was demonetization of gold and movement to the floating currencies that is significantly more flexible.

Evolution of the system

However, the system has continuously undergone several changes in the current environment to an extent it has been achieving equally important development. Neoliberalism has become a dominant ideology of global economic regime started by forty-four countries, and developed nations have turned back its destructive policies (Bissoondeeal, 2008). Many people thought that a collapse of Bretton Woods would result in a decline in the period of rapid growth, but a transition to the floating exchange rates enabled economies to adjust to oil shocks and provision of concessional financing to developing countries by IMF. The breakdown of the system led to a serious consideration of the closer monetary co-operation among European countries and creation of G7 that helped in coordinating the currency adjustment.

Bretton Woods and prevention of global financial crisis 2007/2008

The lessons explained above could help prevent the crisis as politicians could come up with a new technique to the monetary policy and focusing on the higher degree of cooperation between all the currency blocs. In the modern world, a small number of nations have extensive capital controls. There has been liberalisation of the domestic financial systems and a significant transformation of the global capital investments (Widmaier, 2014). Furthermore, the US which was running deficits in its balance of payments is no longer recording current account trade surpluses, and there is an endless diminishing of the gold stock. The international monetary system became less brittle, and therefore, there are no opportunities to break the central banks of different member countries worldwide.

Constraints and need for structural adjustments

Additionally, there were more constraints experienced in the account positions, financial sustainability and political-economic acceptability that primarily depend on the bilateral exchange rate arrangements (Fukumoto, 2011). Information technology, globalisation, deregulation across the financial sector and a rise of the institutional investors have brought several changes that implementation of Britton Woods system cannot work efficiently for the benefit of both developed and underdeveloped nations. It could become more comfortable to predict accumulation of the unsustainable US deficits and henceforth devaluation of the dollar.

Reshaping the monetary system

An act of allowing central banks to control the consumer price inflation while ignoring the house and stock markets eventually led to the unsustainable level of debt that contributed significantly to global financial crisis experienced in 2008 (Clifton et al., 2014). Nevertheless, it could be more efficient to understand that the central bank should not prevent recessions and it is a mistake to separate monetary policy from the bank supervision. Reshaping of the monetary system through recognition of the power of emerging economies such as India and China and reshaping of financial institutions could facilitate the process of curbing the crisis (Bissoondeeal, 2008). Implementation of sufficient structural adjustments could be critical towards promoting growth and emancipating people from concepts of capitalism and imperialism together with reduced of poverty and overreliance on loans.


Bissoondeeal, R. (2008). Post-Bretton Woods evidence on PPP under different exchange rate regimes. Applied Financial Economics, 18(18), 1481-1488.

Clifton, J., Díaz-Fuentes, D., & Lanthier, P. (2014). Utility policy and development since Bretton Woods: The role of Multinationals, governments and International Financial Institutions. Utilities Policy, 29, 33-35.

Fukumoto, Y. (2011). Another Look at the Underlying Cause of the End of the Bretton Woods System: International Price Differences Perspective. Review of International Economics, 19(5), 852-864.

Helleiner, E. (2010). A Bretton Woods moment? The 2007-2008 crisis and the future of global finance. International Affairs, 86(3), 619-636.

Till, H. (2014). The History of Financial Derivatives: A 2-Part Feature – Part 1: The Emergence and Development of Financial Derivatives Post-Bretton Woods. SSRN Electronic Journal.

Widmaier, W. (2014). From Bretton Woods to the Global Financial Crisis: Popular Politics, Paradigmatic Debates, and the Construction of Crises. Review of Social Economy, 72(2), 233-252.

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