Bretton Woods system and the IMF: par values…

Core facts

Bretton Woods Conference: 1–22 July 1944, Bretton Woods, New Hampshire, USA; 44 Allied countries.
It created the IMF and the IBRD (World Bank): the "Bretton Woods twins".
Rival plans: Keynes plan (UK): an International Clearing Union with a world currency, bancor; White plan (USA, Harry Dexter White): a stabilisation fund. The final design was closer to the White plan.
Gold exchange standard: the US dollar was convertible into gold at US$ 35 per fine ounce; other currencies had a par value in gold or US dollars.
Market rates had to stay within ±1% of par.
Adjustable peg: par values could be changed to correct a "fundamental disequilibrium" (never defined in the Articles).
IMF began operations on 1 March 1947; headquarters Washington, D.C. India is a founding member.
Members: 191 (Liechtenstein joined in 2024).
Quota: decides a member's subscription, votes, access to loans and SDR allocation.
SDR (Special Drawing Right): reserve asset created by the First Amendment (1969); first allocation 1970. Also called "paper gold".
SDR basket (from August 2022): US dollar, euro, Chinese renminbi, Japanese yen, pound sterling.
End of Bretton Woods: 15 August 1971, US President Nixon closed the "gold window" (the Nixon shock). Generalised floating from March 1973.
Jamaica Accord (January 1976), given effect by the Second Amendment (1978): legalised floating; gold lost its official role.
Managing Director: Kristalina Georgieva (since 2019; second term from October 2024). First MD: Camille Gutt (Belgium).

Explained

How the par value system worked

Each member declared a par value. The US kept the dollar convertible into gold for foreign official holders at US$ 35 an ounce.
Central banks intervened in the foreign exchange market to keep their currency within ±1% of par.
A member could change its par value by up to 10% of the initial par value (in total) after consulting the Fund, which could not object; larger changes needed the Fund's concurrence.
Scarce currency clause (Article VII): if a currency became scarce in the Fund, members could restrict payments in it.
Examples: sterling was devalued in 1949 (US$ 4.03 → 2.80) and in 1967; India devalued with sterling in 1949, and on its own in June 1966.

India's 1966 devaluation: a worked example

Old rate: Rs 4.76 = 1 US dollar. New rate: Rs 7.50 = 1 US dollar.
Fall in the rupee's dollar value = (7.50 − 4.76) ÷ 7.50 ≈ 36.5% (one rupee fell from about 21 US cents to about 13.3 cents).
Rise in the rupee price of a dollar = (7.50 ÷ 4.76 − 1) ≈ 57.5%.
Both figures describe the same change; textbooks quote the 36.5% figure as the extent of devaluation.

Why Bretton Woods broke down

Triffin dilemma (Robert Triffin, 1960): the world needed more dollars for reserves, which required US deficits; but growing deficits destroyed confidence in the dollar's gold convertibility.
US deficits (Vietnam war, social spending) and falling US gold stocks.
Rigid pegs invited speculation; surplus countries (Germany, Japan) did not revalue enough.
Smithsonian Agreement (December 1971): gold raised to US$ 38 an ounce (dollar devalued about 7.9% against gold); bands widened to ±2.25%. It collapsed by 1973.

IMF quotas

Paid 25% in reserve assets (SDRs or major currencies) and 75% in the member's own currency.
Votes: one vote per SDR 100,000 of quota, plus basic votes shared equally by all members.
Quota formula weights: GDP 50%, openness 30%, variability 15%, reserves 5%.
India: about 2.75% of quotas (eighth largest) and about 2.63% of votes.
Major decisions need 85% of votes, so the USA (about 16.5%) has a veto.

Tranches (the classical scheme)

Tranche	Share of quota	Condition
Reserve (gold) tranche	25%	None; the member's own reserve
First credit tranche	next 25%	Light conditions
Upper credit tranches	beyond 50%	Strict policy conditions, phased

Example: a quota of SDR 1,000 million gives a reserve tranche of SDR 250 million; each credit tranche is another SDR 250 million.

SDR basket weights (2022 review)

Currency	Weight (%)
US dollar	43.38
Euro	29.31
Chinese renminbi	12.28
Japanese yen	7.59
Pound sterling	7.44

Weights add to 100. The renminbi joined the basket on 1 October 2016.
The SDR is not a currency and not a claim on the IMF; it is a potential claim on the freely usable currencies of members.
The SDR interest rate is set weekly from short-term rates on the basket currencies.

Main lending facilities

Facility	Use
Stand-By Arrangement (SBA)	Short-term balance of payments problems
Extended Fund Facility (EFF)	Medium-term, structural problems
Flexible Credit Line (FCL)	Precautionary; for very strong policy records
Precautionary and Liquidity Line (PLL)	Sound economies with some weaknesses
Rapid Financing Instrument / Rapid Credit Facility	Fast emergency finance (RCF: low-income)
Extended Credit Facility (ECF)	Concessional, low-income countries
Resilience and Sustainability Facility (RSF)	Climate and pandemic resilience (2022)

Deeper

Purposes of the IMF (Article I): monetary cooperation, balanced growth of trade, exchange stability, a multilateral payments system, temporary resources to correct BoP imbalances, and shorter, less severe disequilibria.
Article IV: annual surveillance consultations with each member. Article VIII: current account convertibility; India accepted Article VIII in August 1994. Article XIV: transitional arrangements for members not yet convertible.
Two departments: the General Department (General Resources Account: quota-funded lending) and the SDR Department. Concessional loans run through the Poverty Reduction and Growth Trust (PRGT).
Borrowed resources: the New Arrangements to Borrow (NAB) and bilateral borrowing supplement quotas.
SDR mechanics:
- Valued at 0.888671 gram of gold (= US$ 1) in 1969; a 16-currency basket from 1974; a 5-currency basket from 1981.
- Allocations: 1970–72, 1979–81, 2009 and August 2021 (about SDR 456 billion, roughly US$ 650 billion, the largest ever).
- Allocated in proportion to quotas. A member earns interest on holdings and pays interest on allocations.
- The basket is reviewed every five years.
Quota reviews: the 14th review (2010) doubled quotas and took effect in 2016; the 16th review (December 2023) approved a 50% increase with no change in shares, effective only after members consent.
Conditionality: prior actions, quantitative performance criteria (for example, ceilings on deficits or credit), structural benchmarks. Funds are released in phases after reviews.
India and the IMF:
- 1981: an EFF of SDR 5 billion, then the largest in IMF history; India drew SDR 3.9 billion and ended it early.
- 1991: stand-by arrangement and compensatory financing during the BoP crisis; all repaid by 2000.
- India now contributes to IMF lending (for example, buying IMF notes in 2009).
After Bretton Woods: a "non-system" of managed floats, pegs and currency unions; the dollar remains the main reserve currency.

Common traps

✗ "Bretton Woods is in Switzerland." ✓ New Hampshire, USA.
✗ "The IMF began work in 1944." ✓ Conference 1944; operations from 1 March 1947.
✗ "Under Bretton Woods every currency was convertible into gold." ✓ Only the US dollar, at US$ 35 an ounce; other currencies were pegged to the dollar.
✗ "The bancor was adopted at Bretton Woods." ✓ It was Keynes's proposal; the White plan prevailed.
✗ "The Smithsonian Agreement started floating." ✓ It re-pegged at US$ 38 with ±2.25% bands; floating came in 1973 and was legalised by the Jamaica Accord (1976).
✗ "SDRs were created in 1944." ✓ In 1969 (First Amendment); first allocated 1970.
✗ "The SDR basket has the Swiss franc." ✓ Dollar, euro, renminbi, yen, pound.
✗ "The reserve tranche carries conditions." ✓ It is drawn without conditions.
✗ "India devalued by 57.5% in 1966." ✓ The rupee's value fell 36.5%; 57.5% is the rise in the rupee price of a dollar.

Quick revision

Bretton Woods, July 1944, New Hampshire, 44 countries; IMF + IBRD.
US$ 35 an ounce; par values ±1%; adjustable peg for "fundamental disequilibrium".
Keynes: bancor; White plan won.
IMF from 1 March 1947; 191 members.
Nixon shock 15 Aug 1971; Smithsonian Dec 1971 (US$ 38, ±2.25%); floating 1973; Jamaica 1976.
Triffin dilemma: reserve currency needs deficits that erode confidence.
SDR 1969; basket: USD 43.38, EUR 29.31, CNY 12.28, JPY 7.59, GBP 7.44.
Reserve tranche 25% of quota, no conditions.
India: 2.75% quota; Article VIII in 1994; 1966 devaluation 36.5%.

Go deeper: Mains writing (beyond what APPSC Paper I usually asks)

Mains writing Mains writing

Frame: Bretton Woods gave the world 25 years of exchange stability and fast growth, but its reliance on one national currency made it fragile.
Analysis:
- The Triffin dilemma reappears whenever one national currency is the world's reserve.
- The IMF moved from managing pegs to surveillance and crisis lending.
- Quotas lag behind the weight of emerging economies; India is under-represented.
- Conditionality has been criticised for austerity bias.
Way forward: quota realignment, a larger role for the SDR, faster precautionary lines, and social-spending floors in programmes.
Example: the 2021 SDR allocation and its rechannelling to poorer countries through the PRGT and RSF.

Medha AI writes its own notes and checks them against the sources listed. Medha AI is an independent preparation service. It is not affiliated with, endorsed by or connected to APPSC, TSPSC, MPSC, UPSC or any other commission or government body.

2.1.2 Bretton Woods system and the IMF: par values, quotas, SDRs and lending facilities

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