Question

Brief description of the contents, limitations and causes of the collapse of the Bretton Woods system.

Answer 1

The Bretton Woods System is an international monetary system occurred in 1944 and established the basic framework for promotion of the post war exchange rate stability and coordinate international monetary policies. The system called for fixed exchange rates against the U.S. dollar. The main goals included to make the gold standard basis for the Bretton Woods international monetary system thus preventing the recurrence of economic nationalism with destructive "beggar- thy-neighbor" policy and also addressing the lack of clear rules of the game plaguing the interwar years.

However because of the below given limitations/ events directly or indirectly contributed to the collapse of Bretton Woods:

1. As in the case of Gold Standard, Bretton Woods also did not provide for any revision in
the price of gold. Because of inflation, it became uneconomical to produce gold, as a result caused the suspension of gold production in several nations resulting to the stagnation of gold reserves which had negative impact on international liquidity.

2. Bretton Woods system did not provide for any revaluation of parities and because of these surplus nations such as Japan and West Germany continued to enjoy export competitiveness against the economy of United States. Due to thus it aggravated the US trade deficit.

　

3. The Bretton system did not allowed for a price revision of gold in terms of USD. Because of this it was not difficult to devalue the US Dollar despite continued trade deficit. The dollar devaluation would have negatively affected all nations having USD
reserves.

4. The continued U.S. trade deficit resulted to an over-supply of USD in the
international financial markets which decreased the USD acceptability. When the
Gold Convertibility Clause was invoked, the authorities of America could not honour their commitment to redeem dollars against gold; and this caused to the collapse of the system in 1971.