Essay: Rules and Institutions of the Bretton Woods System

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[. . .] History shows that, unions that are centralized are permanent and durable with abilities to adjust to the disturbances and survival shocks as compared to decentralized unions that have a high tendency to disintegrate under political and economic turmoil (Cesarano, 2007).

Monetary unions often face the risk of disintegrated unification among the member states. Political unification often results in monetary unification that sustains the survival of the union (Gnos and Rochon, 2006). However, hegemonic loses in power in member state places the union at risk of disintegration. This calls for the need for the establishment of clearly defined policies and anticipatory measures to respond to such challenges. Shared values related to the benefits of ensuring cooperation among the sovereign member states maintains the stability and functioning of the monetary unions (Boughton, 2008). This entails taking into consideration the varied historical, religious, cultural, and geographical factors implicated to influence the relationship and sustainability of the union. The EMU learnt from the success and failures of the Bretton Woods System that, creation and separation of a monetary union take a long period characterized with challenges that might inhibit success. Thus, it is imperative for the development of anticipatory measures to respond to the challenges that might affect the process (Bordo, Eichengreen, and National, 1993).

Political unity act as a glue holding a monetary union together, a disappearance of the unity has a basic rule of ending the unity and strength of the union. As such, ensuring political stability among the member states is a prerequisite of the EMU to see its success. As stated by Bernstein and Kirshner, (1996) the EMU learnt from the experiences of the Bretton Woods Systems that, fiscal federalism is not a key determinant of sustainability and longevity of a monetary union. Monetary unification do not necessary need fiscal unification, but it mainly relies on the central control of the money supply among the member states. As such, if the established system developed to determine taxes facilitates and maintains political unity, this will result in the enhancement of the monetary union (Avgouleas, 2010).

Irrespective of the alternative of exchange adopted by a monetary union, the economy of the member states is subject to negative business cycle, macroeconomic disturbances, and crises influencing the stability of the monetary union. This proves for the European Monetary Union that no monetary intervention that will guarantee a future free of a shock to its sustainability. Evidence from the analysis of the historical experience of the Bretton Woods Systems, it is predicted that, the European Monetary Union will behave as a centralized monetary institution to ensure its performance and sustainability (Ardy, 2000). The fact of its having a monopoly power in the provision of the euro will attest to its prediction to function in the future as a centralized monetary union. According to currency area theories, the euro era of the EMU is expected to move closer to acquiring an "optimal monetary union" with time. This is caused by the behavior of the involved institutions in embracing the stated policies that ensure its success.


The establishment of various fiscal bodies and policies like the Bretton Woods System are essential in ensuring that currencies are stabilized. This study has shown that the system's formulation was informed by the constant economic challenges that face the global economy. The Bretton Woods System is seen to have succeeded unlike the EMU. The system succeeded because its key fundamental design feature which adopted the principle of the flexible linking the foreign currency to gold. Besides, the success of the system rests largely on the unity and cooperation among partner nations. Conclusively, the success of a monetary union depends on numerous factors that must be taken into consideration besides adopting experiences from other unions.


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