Question

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

b) Explain how it collapsed.

Answer 1

In 1900 the Gold Standard Act was passed in which gold was established as only metal to be exchanged against paper money. In 1860 was the paper currency printed for the first time but money could be freely converted in gold after the Gold Standard Act. There was no such problem in the initial phase but during world war countries needed more and more money for the expansion of the army but the gold was limited. All the money in circulation should be equal to the amount of gold as per the Gold Standard Act so countries did some modifications in it and then printed more money. After 1929, people started trading in commodities during the recession and the value of currency went down so people started the conversion of their money into gold then the end of the Gold Standard System came. Countries now realized that keeping currency and gold unattached was important.

The USA came to know that it needs to keep its supremacy to keep the dollar in the center of all this but with the introduction of the Bretton wood system the dollar was fixed at the rate of existing parity of $35 per ounce. The conversion of gold and currency for free was stopped.

Now it was not necessary to keep gold against the printed dollar and conversion of capital and export of gold was prohibited because the value of the dollar was fixed now.