The Bretton Woods System

Collapse and Transition of Bretton Woods, 1971-1993

The Bretton Woods system came to an end in the 1970s. This resulted into a switch from a state-led to a market-led system of monetary control. A number of crucial events lead to its end; the suspension of the dollar's convertibility into gold in 1971.

The Bretton Woods system was dependant on the United States economy; this was a huge cause to the Bretton Woods down fall. The system was designed in a way that it would remain strong if the United States economy remained strong.

The economy of the United States faced inflationary pressure from operating a balance of payment deficit, the expenditure of the federal government rose from financing the Vietnam War and social programs. The U.S

During the Bretton Woods era, the U.S dollar was the most stable, most powerful, dominant currency. It was the only currency that was strong enough to be exchanged for gold. Most countries traded in dollars. After the collapse of the Bretton Woods system in 1973, the lack of a dominant currency resulted into a floating exchange rate system.

The world’s major currencies (e.g. The Yen, Sterling pound, Euro, US dollar) have floated in value versus each other.

The exchange rates all over the world for most countries are flexible. It makes trade between developing and developed countries manageable and profitable. When fixed, trade is expensive for most developing countries; with the current economic recession, flexibility is what the economy needs to make profitable trade. Exchange rate is a nominal exchange rate; it is the rate at which one currency can be exchanged into another currency. Most of the developed industrial nations operate on a floating exchange rate. Floating exchange rate is freely floating and is mostly determined by market demand and supply without any government

The floating exchange rates allow for the adjustment of prices for both domestic and foreign goods. For example: the US dollar appreciates so it can buy more rubles, the Russian goods are less expensive and Americans buy more of them. Importers demand for more rubles causing the ruble to appreciate; American goods are now less expensive and Russians buy more of them. Importers demand more dollars causing the dollar to appreciate and then the US dollar will appreciate and the cycle starts all over again.

The government of a country doesn’t let exchange rate change in response due supply and demand for the currency this known as a fixed exchange rate. The government will buy or sell its currency to keep the exchange rate at a particular point or near a particular point.

Fixing exchange rates has a lot of problems. If a country cannot successfully fix the exchange rate at the point it wishes, then it must chose another (lower) exchange rate. The lowering of the exchange rate is called devaluation of the currency (this is done by increasing the money supply). Revaluation on the other hand is the process of increasing a fixed exchange