Question

Explain the Bretton Woods system. You should refer to:

o As a result of the Bretton Woods system, what happened with the exchange rates? Was it fixed? Was it floating? (10p)

o Why did the Bretton Woods system collapse?(10p)

o Would be such a system feasible nowadays?

Answer 1

SOLUTION :

1. Bretton Woods system was start from July 1944, delegates from forty-five of the allied powers engaged in World War II met in Bretton Woods, New Hampshire, in the United States to plan for the economic institutions believed necessary to assist in the reconstruction, development, and growth of the postwar economy. Foremost on the delegates’ minds was the instability of the international economic system after World War I, including the experiences of hyperinflation as in Germany in 1922–1923 and the worldwide depression of the 1930s. One element believed necessary to avoid repeating the mistakes of the past was to implement a system of fixed exchange rates. Not only could fixed exchange rates help prevent inflation, but they could also eliminate uncertainties in international transactions and thus serve to promote the expansion of international trade and investment. It was further hoped that economic interconnectedness would make it more difficult for nationalism to reassert itself.The Bretton Woods system of exchange rates was set up as a gold exchange standard, a cross between a pure gold standard and a reserve currency standard. In a gold exchange standard, one country is singled out to be the reserve currency.

Floating exchange rates are exchange rates that are based upon supply and demand in the foreign exchange (currency) markets. This means that, like stock prices on the stock exchange, floating exchange rates are always changing.

Fixed exchange rates are exchange rates that are pegged by a government's monetary authority (e.g. central bank) to a set rate. It's not uncommon for governments to set or peg the value of their currency to the USD. The fixed exchange rate is implemented and maintained as the central bank buys and sells its nation's currency on the foreign exchange market in order to keep the currency's price at a steady level.

2. On August 15, 1971, without prior warning to the leaders of the other major capitalist powers, US president Nixon announced in a Sunday evening televised address to the nation that the US was removing the gold backing from the dollar. The commitment by the US to redeem international dollar holdings at the rate of $35 per ounce had formed the central foundation of the post-war international financial system set in place at the Bretton Woods conference of 1944. Nixon’s unilateral announcement dealt it a fatal blow.However, the growth of the Euro dollar market had exactly the effect that Keynes and Harry Dexter White, the chief US negotiator at Bretton Woods, had foreshadowed. Growing amounts of finance capital were now able to move around the world outside the control of governments. The system of fixed exchange rates could not be sustained. The pound came under pressure in 1967, followed by the dollar in 1968. In 1971, a qualitative change took place as the US, for the first time since before World War I, experienced a balance of trade deficit, leading to the Nixon announcement on August 15.Its demise in 1971 inaugurated a new stage, characterised by the development of globalised production and the domination of an international financial market. When the US pulled the rug from under the previous system it did so in order to maintain its position of global hegemony in the new economic order which was beginning to emerge. It managed to do so but at great cost.

3.  Feasiblity of these system are not possible in nowaday because every country fixe and floating exchange rate are differe from each another. like sume underdeveloping country and developed country same pattern of exchange.But some country its feasiblity are very inportant of the global economic backdrop has undoubtedly changed significantly since these institutions were established. The centre of global gravity, which had been shifting from Asia to the West since the Industrial Revolution, is now returning to the Asia-Pacific region. Along with this shift we are also seeing a dispersion. The world is no longer unipolar with a clear single centre; the centres of growth are increasingly spread across a range of hubs.