The new economic system required an accepted instrument for investment, trade and payments. However, unlike economies, the international economy does not have a central government capable of issuing and managing currency use. In the past, this problem had been solved by the gold standard, but the architects of Bretton Woods felt that this option was not feasible for the post-war political economy. Instead, they have set up a fixed exchange rate system managed by a number of newly created international institutions that use the U.S. dollar (a gold standard currency for central banks) as a reserve currency. The Bretton Woods system, ready to learn from the painful experiences of the past, has established a core of two main principles. The first principle concerns the guaranteed convertibility of national currencies between Member States. Convertibility means that each country agrees to buy its own currency from other central banks for gold or to ask for the country`s currency. In addition, a country that signs the agreement should accept that the free movement of its currency is not restricted. The United States launched the Marshall Plan for the economic recovery of the European Union in order to provide significant financial and economic assistance to the reconstruction of Europe, largely through subsidies rather than loans. The member countries of the Soviet bloc, for example. B Poland, were invited to receive the subsidies, but obtained a favorable agreement with the COMECON of the Soviet Union. [31] In a speech at Harvard University on June 5, 1947, U.S.
Secretary of State George Marshall said, “I know Christine Lagarde is looking forward to speaking to you today. But once again, the IMF is going through a period of transition. Fortunately, we`re used to it. One of the main elements of my speech today is that the IMF is an institution capable of adapting to change. There was broad consensus among powerful nations that the lack of exchange rate coordination during the interwar period had exacerbated political tensions. This facilitated the decisions of the Bretton Woods conference. In addition, all the Bretton Woods governments agreed that the monetary chaos of the interwar period had brought some valuable lessons. Instead of having de facto U.S. dollars (or euros) or market-determined exchange rates, countries characterized as emerging countries (and even low-income countries) could experience another system that could build on the positive aspect of the former Bretton Woods. For example, renminbi, Ruupien, baht, Rand, Rubel, Real and Naira could be valued with a basket of international currencies and a series of relevant commodities. This benchmark basket can be a mixture of U.S. dollars, euros, yen, crude oil and gold.
This system could reduce incentives for hot capital inflows into EMEs, which are simply determined by carry trade grounds, because the value of rupees, although still linked to the dollar, is partly determined by conditions in the gold and oil markets. 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. The agreement did not promote the discipline of the Federal Reserve or the U.S. government. The U.S.
Federal Reserve expressed concern about a rise in the domestic unemployment rate due to the depreciation of the dollar. To undermine the efforts of the Smithsonian Agreement, the Federal Reserve lowered interest rates in order to pursue a pre-domestic policy objective of full national employment. With the Smithsonian agreement, member countries had expected the dollar to return to the United States, but lower interest rates within the United States have kept the dollars flowing from the United States.