Question

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

Answer 1

The Gold Standard act was passed in 1900 which established gold as only metal to be exchanged against paper money. The paper currency was first printed in 1860 and after the Gold Standard Act money could be freely converted into gold. Initially, there was not much a problem but during World War countries wanted more and more money to expand army but the gold was limited. As per Gold Standard all the money in circulation should be equal to amount of gold, so countries modified it and printed more money. After 1929 during recession people started trading in commodity and the currency value went down people started converting their money into gold thus came the end of the Gold Standard System. Now countries knew that it was important to keep currency and gold unattached.

USA knew that to keep its supremecy it needs to keep the dollar in centre of all this thus Bretton Woods System was introduced and fixed the dollar at rate of exisitng parity of $35 per ounce. The free conversion of gold and currency was stopped.

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