Why did the Bretton Woods system came to an end?
Why did the Bretton Woods system come to an end?
The Bretton Woods system was created in July 1944 by the United States and its allies in order to formulate a plan for European recovery and create a new postwar international monetary and financial system that was supposed to encourage grow and development (Balaam, Dillam 2011). The Bretton Woods financial and monetary structure was supposed to ensure exchange rate stability and encourage its member countries to eliminated exchange rate restrictions that hinder trade. The International Monetary Fund (IMF) and the World Bank were conceived by the Bretton Woods system (International Monetary Fund). The countries that joined the IMF adopted an alternated version of the former gold standard’s fixed exchange rate system. Members of the IMF agreed to keep the value of their currencies in terms of the U.S. dollar, and the U.S. dollar was fixed by the value of one ounce of gold at 35 dollars. Additionally to the gold standard, governments agreed to intervene in foreign exchange markets to keep the value of currencies within one percent above or below the fixed exchange rate (Balaam, Dillam 2011). According to Fred Block the international institution created at the Bretton Woods system was designed to operate in the relative stable international conditions to be reached after the postwar transition period; nations were committed to maintain their currencies at a constant exchange rate relative to other member currencies; nations would remove all restrictions on current transactions (Block 1977).
Under the Bretton Woods system of fixed exchange rates, by the early 1960’s, the U.S fixed value against gold was seen as overvalued. Additionally, President Lyndon Johnson increased domestic spending in programs such as Great Society and rise in military spending caused by the Vietnam War, which gradually deteriorated the overvaluation of the dollar. The system came to an end in August 19971, when U.S. President Richard Nixon
The Bretton Woods system was created in July 1944 by the United States and its allies in order to formulate a plan for European recovery and create a new postwar international monetary and financial system that was supposed to encourage grow and development (Balaam, Dillam 2011). The Bretton Woods financial and monetary structure was supposed to ensure exchange rate stability and encourage its member countries to eliminated exchange rate restrictions that hinder trade. The International Monetary Fund (IMF) and the World Bank were conceived by the Bretton Woods system (International Monetary Fund). The countries that joined the IMF adopted an alternated version of the former gold standard’s fixed exchange rate system. Members of the IMF agreed to keep the value of their currencies in terms of the U.S. dollar, and the U.S. dollar was fixed by the value of one ounce of gold at 35 dollars. Additionally to the gold standard, governments agreed to intervene in foreign exchange markets to keep the value of currencies within one percent above or below the fixed exchange rate (Balaam, Dillam 2011). According to Fred Block the international institution created at the Bretton Woods system was designed to operate in the relative stable international conditions to be reached after the postwar transition period; nations were committed to maintain their currencies at a constant exchange rate relative to other member currencies; nations would remove all restrictions on current transactions (Block 1977).
Under the Bretton Woods system of fixed exchange rates, by the early 1960’s, the U.S fixed value against gold was seen as overvalued. Additionally, President Lyndon Johnson increased domestic spending in programs such as Great Society and rise in military spending caused by the Vietnam War, which gradually deteriorated the overvaluation of the dollar. The system came to an end in August 19971, when U.S. President Richard Nixon
Bibliography: Balaam, David N. and Bradford Dilman, Introduction to International Political Economy, Pearson Education INC, 2011. Wood, Duncan, Governing global banking: the Basel Committee and the politics of financial globalisation (Aldershot: Ashgate, 2005).