Question

a) Explain how the Breon Woods System worked and how it differed from the Gold Standard. Then explain how it collapsed.

Answer 1

Bretton Woods system was the earliest system to be utilized for controlling money value among different countries.It says that every country should have a money policy which will help to keep the currency exchange rate in the limits of fixed worth or value - add or less of 1%, in gold terms.IMF was developed to check and control the imbalances in payments on temporary basis.The developers of Bretton Woods system, developed the structure of rules and regulations , processes and institutions, which help to control or adjust money system at international level.They also developed IBRD and IMF.Under this system , the central banks of all countries excluding US had to work to keep their own currency and dollars exchange rates fixed by looking in exchange markets of foreign countries. If the currency value of country is more in respect to dollar, central bank of the country will sell its own currency in place of dollar ,to make its currency value fall.

Bretton Woods system is different from gold standard as Bretton Woods system is based on fixed exchange rates whereas gold standard is based on fluctuating exchange rate.Devaluation is included in Bretton Woods system and one major improvement from gold standard is adjustable peg policy

The Bretton Woods system collapsed because of imbalanced payments of industrial countries of West in 1960s and 1970s. This made the system weak.The main issue was that US dollar was meant to be a reserve money at international level at that point of time.This gives freedom to national monetary policy and national fiscal policy from the economic stresses from outside though effecting the outside economies adversely.Under the pressure to make sure international liquidness,US was pressurised to show defeciency in their balance of payments.Due to change in inflationary policy, the conversation of US dollar was limited due to insufficient reserves.Other countries also who were the members , were not accepting high level of inflation rates resulting in making US dollar weak and undesirable. After this, they faced many more problems and then at last , due to increased stress , it was finalised that dollars will not be converted to gold and the Bretton Woods system collapsed.