Question

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

b) Explain how it collapsed.

Answer 1

a) Bretton Woods system was used to control the value of money among different countries. It was the first system of this kind. This system works by requiring a currency peg to the U.S. dollar which was further pegged to the price of gold. Thus, gold was the basis for the U.S. dollar in this system.

Bretton Woods system was different from Gold standard system as follows:

• The Bretton Woods system was the fixed exchange rate system whereas gold standard was a floating exchange rate system.
• Under Bretton Woods system only U.S. was allowed to buy or sell gold at a fixed price. The central bank of all other countries in Bretton Woods system then pledged to buy or sell their currencies against U.S. currency dollar. However in Gold standard system all the countries who participated were allowed to buy or sell gold at a fixed price.

b) Bretton Woods system came to an end in 1970 when President of the U.S. announced that U.S. currency will no longer be exchanged for the gold. This decision of suspending gold convertibility lead to the failure of this system. It collapsed because of the inflationary monetary policy that was found inappropriate for the key currency country of the system. The reasons for this include rigidity of exchange rates, conflicts of national economic policies, instability of frelly floating exchange rates etc.