Bretton Woods System

Bretton woods was a semi fixed exchange rates set up in the post war period. The Bretton Woods exchange rate system had a system of pegged exchange rates with currencies pegged to the dollar.

The dollar was fixed to the price of gold ($35 an ounce) – giving the US Dollar a fixed value.

The currencies in Bretton Woodswere only to be revalued in the event of fundamental disequilibrium. The system ended in 1971.

The idea of the Bretton Woods was

  • Provide stable exchange rates to encourage investment and economic growth
  • Encourage countries to maintain low inflation / competitiveness – in order to maintain value of exchange rate.
  • Try to prevent competitive devaluation – where countries seek to gain short-term advantage by reducing value of currency.

Collapse of the Bretton Woods System

In the late 1960s there was a run on the Pound Sterling and later the dollar. It was partly caused by a booming US trade deficit. With the US unwilling to use protectionism as a measure to reduce imports – the link between the dollar and gold were broken in 1968. There was a short period of a floating Bretton woods exchange rate, but it was effectively ended by 1971. Some of the structural changes which undermined the Bretton Woods system included:

  1. Rise of global trade
  2. Growth of international currency markets with hedging and speculation causing fluctuations in exchange rate
  3. Decline of US economic and monetary hegemony. After Second World War the US economy was dominant but it declined in relative importance by 1970s.
  4. Decline of the Dollar

Bretton Woods Conference

Bretton Woods is a ski resort chosen as a location for a conference in 1944 to decide on the new international monetary arrangements for after the end of the Second World War. It was attended by over 700 delegates from 44 allied countries. The conference led to the creation of

  • International Monetary Fund IMF
  • International Bank for Reconstruction and Development IBRD – this was later to be known as the World Bank

The aim of the Bretton Woods conference was to provide greater global financial stability and enable the movement of capital to struggling economies.

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