On February 12, 1973, the United States was once again forced to devalue dollar by about 10 percent. Introduction In times of globalisation the economic environment changes rapidly. The high interest rates further accentuated capital flow from the United States to the countries of Europe and Japan and precipitated in 1970-71 the fall of Bretton Woods System. 1  Nixon and the End of the Bretton Woods System, 1971–1973. Each member country was assigned a quota on the basis of its economic importance and the volume of its international trade. The member countries could intervene in the exchange markets to prevent the fluctuation beyond the permissible limit. Together these two form the Bretton Woods institutions. In order to accomplish these objectives, new practices and institutions had to be devised. It was against this background that plans for a new world trade and monetary order were worked out in the USA during the World War II to prevent the repetition of the 1930s. Welcome to EconomicsDiscussion.net! Apart from persistently increasing demand for dollars, this currency also emerged as the principal ‘intervention currency’—a currency which monetary authorities bought or sold in foreign exchange markets to keep exchange rates within ± 1 percent margin round the par values. Thirdly, in the present international monetary system, the member countries are allowed either to float or peg their currencies. One of the predominant causes of the breakdown of the Bretton Woods System was the problem of liquidity. 7 Forms of Gender Inequality – Discussed. By August 1971 the par value system broke down. But some authors convincingly argued that the re-establishment of the gold standard brought in the Great Depression of the 1930s and the associated financial problems. The Bretton Woods agreement of 1944 established a new global monetary system. Therefore, the need for a stabilising system becomes more and more apparent. During this period, there were conditions of relatively free trade, a rapid expansion in trade and capital mobility. The main threat to the system as a whole was the Triffin problem, which was exacerbated after 1965 by expansionary US monetary and fiscal policy which led to rising inflation. At present, its membership has gone upto 184. They did this by intervening in foreign exchange markets. By March 1973, the IMF introduced managed floating exchange rate system. The result was acute dollar shortage. It led to the speculative capital movements from the United States to other surplus countries such as Germany, Japan and Switzerland. It is often referred as ‘Triffin dilemma’ i.e., either the United States corrected its deficit and created a liquidity shortage or it continued to run the BOP deficit. The Bretton Woods system was drawn up and fixed the dollar to gold at the existing parity of US$35 per ounce, while all other currencies had fixed, but adjustable, exchange rates to the dollar. Most of the countries then adopted nationalistic policies to avoid further disruption. This implied the devaluation of dollar by about 9 percent. In the process, a classic ‘crisis of confidence’ over the dollar came out. The features, on the other hand, that were to be retained included stability of gold standard, easy adjustment mechanism, market freedom of floating rates, the discretionary control over market forces of the flexible rate system and the selective use of controls. In December 1971, the representatives of the Group of Ten met at the Smithsonian Institute in Washington. After a spike in the London price of gold to $40.50 in October 1960 – based on fears that John F Kennedy, if elected, would pursue inflati… Japan, on the other hand, continued to have a large BOP surplus. There was very little inflation or unemployment in the major industrial countries. Before publishing your Articles on this site, please read the following pages: 1. They decided to let their currencies float jointly. The currencies in Bretton Woods were only to be revalued in the event of fundamental disequilibrium. The United States devalued dollar by 8.6 p.c. 5. In other words, the System would aim at achieving a stable exchange rate and at lessening the duration and reducing the degree of BOP disequilibrium. There was only a limited purpose behind it to make the system of managed float work better. Four main features of the Bretton Woods system was as follows. When the exchange markets reopened on March 19, 1973, all of the World’s major currencies were floating. Such an expectation resulted in an almost embarrassing accumulation of reserves due to large scale inflow of foreign funds to that country. The things that were to be avoided included rigidity of exchange rates and associated deflationary adjustment mechanism of the gold standard, the instability of the freely floating exchange rates, conflicts of national economic policies, competitive exchange depreciation and the repressive and distorting techniques of exchange controls. So the crucial issue was to determine whether the disequilibrium was temporary or fundamental. Both Johnson and Nixon administrations were unwilling to finance the war efforts by increased taxes. Four main features of the Bretton Woods system was as follows. With the outbreak of the World War I, the gold standard system failed and the currencies were exchanged at floating rates. Other governments set their exchange rates to dollars by the gold standard. The dollar was fixed to the price of gold ($35 an ounce) – giving the US Dollar a fixed value. 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