We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

The Bretton Woods System Essay

Essay Topic:

Paper type: Essay

Words: 432, Paragraphs: 4, Pages: 2

Sorry, but copying text is forbidden on this website!

or Listen to your own essay

The Bretton Woods System (BWS) was implemented in 1946 under the Bretton Woods Agreement, each government obliged to maintain a fixed exchange rate for its currency vis-à-vis the dollar or gold. As one ounce of gold was set equal to $35, fixing a currency’s gold price was equivalent to setting its exchange rate relative to the dollar. The fixed exchange rates were maintained by official intervention in the foreign exchange markets. This intervention was about purchases and sales of dollars by foreign central banks against their own currencies whenever the supply and demand conditions in the market deviate from the agreed on par values.

Any dollars acquired by the monetary authorities in the process of an intervention could then be exchanged for gold at the U.S Treasury. In principle, the stability of exchange rates removed uncertainty from international trade and investment transactions.

Normally, if a country followed its own policies leading to a higher inflation rate than its trading partners would experience a balance of payments deficit as its good became more expensive, which means its exports will decrease.

A deficit has consequences, an increase in the supply of the deficit country’s currency on the foreign exchange markets. The excess supply would demoralize the exchange value of the currency of that country, forcing its authorities to intervene. The nation would be required to buy with its reserves the excess supply of its own currency, in order to reduce the domestic money supply. In addition, as the country’s reserves were depleted, the authorities would be forced to change economic policies to eliminate the source of deficit. The reduction in the money supply and the adoption of restrictive policies would reduce the country’s inflation.

Basically, Bretton Woods was a fixed exchange rate system in name only. With 21 major industrial countries, only the U.S and Japan had no change in par value between 1946 and 1971. From the 21 countries, 12 devalued their currencies more than 30% against the dollar, four had revaluations, and four others were floating their currencies till the end of the system. On mid-1971, the president Richard Nixon was obliged to devalue the dollar to deal with America’s emerging trade deficit. The two reasons for the collapse of (BWS) are, inflation in U.S, they financed the escalating war in Vietnam, so they were printing money instead of raising taxes. Another reason is that West Germany, Japan, and Switzerland refused to accept the inflation because a new fixed exchange rate with the dollar will be imposed on them. Thus, the dollar depreciated sharply relative to the currencies of those three countries.

How to cite this page

Choose cite format:

The Bretton Woods System. (2016, Dec 11). Retrieved from https://studymoose.com/the-bretton-woods-system-essay

Is Your Deadline Too Short? Let Professionals Help You

Get Help

Our customer support team is available Monday-Friday 9am-5pm EST. If you contact us after hours, we'll get back to you in 24 hours or less.

By clicking "Send Message", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
No results found for “ image
Try Our service
online

Hi, I am Sara from Studymoose

Hi there, would you like to get such a paper? How about receiving a customized one? Click to learn more https://goo.gl/CYf83b

online

Hi, I am Sara from Studymoose

Hi there, would you like to get such a paper? How about receiving a customized one? Click to learn more https://goo.gl/CYf83b

image

Your Answer is very helpful for Us
Thank you a lot!