The dollar had now become a substitute for gold. As a result, the value of the dollar began to increase relative to other currencies. The transition created more demand for dollars, even though its worth in gold remained the same. This discrepancy in value planted the seed for the collapse of the Bretton Woods system three decades later. Until World War I, most countries were on the gold standard. However, they cut the tie to gold so they could print the currency needed to pay for their war costs.
This inflow of currency caused hyperinflation, as the supply of money overwhelmed the demand. After the war, countries returned to the safety of the gold standard. Hyperinflation caused the value of money to fall so dramatically that, in some cases, people needed wheelbarrows full of cash just to buy a loaf of bread.
All went well until the Great Depression. After the stock market crash, investors switched to commodities trading. It drove up the price of gold, resulting in people redeeming their dollars for gold.
The Bretton Woods system gave nations more flexibility than strict adherence to the gold standard. It also provided less volatility than a currency system with no standard at all. A member country still retained the ability to alter its currency's value, if needed, to correct a "fundamental disequilibrium" in its current account balance. They'd need a kind of global central bank they could borrow from if they needed to adjust their currency's value and didn't have the funds themselves.
Otherwise, they would just slap on trade barriers or raise interest rates. Instead, they agreed to contribute to a fixed pool of national currencies and gold to be held by the IMF. Each member country of the Bretton Woods system was then entitled to borrow what it needed, within the limits of its contributions.
The World Bank, despite its name, was not and isn't the world's central bank. The purpose of the World Bank changed to loaning money to economic development projects in emerging market countries.
In , the United States suffered from massive stagflation—a combination of inflation and recession, which causes unemployment and low economic growth. In response to a dangerous dip in value caused by too much currency in circulation, President Nixon started to deflate the dollar's value in gold.
The devaluation plan backfired. It created a run on the U. In , Nixon unhooked the value of the dollar from gold altogether. The creation of Bretton Woods resulted in countries pegging their currencies to the U. In turn, the dollar was pegged to the price of gold, and the U. The U. When the dollar ceased to be pegged to the price of gold, it became the monetary standard with other currencies pegging their currencies to it.
Federal Reserve History. Library of Economics and Liberty. Article published Schwartz, " U. Eichengreen, Barry. New York: Oxford University Press, Kenen, Peter. Durlauf and Lawrence E. Palgrave Macmillan, Meltzer, Allan H. Policy in the Bretton Woods Era.
Louis Review 73, no. Patinkin, Don. Marriner S. Eccles Governor. Szymczak Member. Current Fed leaders. Classroom resources About this site Our authors Related resources.
The system of currency convertibility that emerged from Bretton Woods lasted until Understanding the reasons behind these events, the nature of their implementation, and their continuing effects on global banking systems is part of becoming a knowledgeable and informed financial professional. The Bretton Woods Agreement is one of these watershed moments in the development of modern financial systems, setting up the dollar as the default currency for worldwide exchanges in the aftermath of World War II.
While the Bretton Woods system was phased out during the Nixon administration, the financial institutions created by the agreement—the International Monetary Fund and the World Bank—remain enduring parts of 21st century finance. Modern economic professionals can gain perspective and insight from uncovering the past of their profession.
World War II devastated many nations, with lives lost and infrastructure destroyed at staggering rates. As the war continued, financial policies had to change to address the effects of the war on world economies. The Allied nations sent representatives to Bretton Woods, New Hampshire, in June to work on a new system to standardize exchange rates between world currencies and the U.
The Bretton Woods system was implemented as a more stable replacement for the gold standard, under which all currencies were convertible into gold. The fact that the U. The delegates in New Hampshire established the International Monetary Fund to provide loans to companies in debt and oversee exchange rates around the world.
The conference also created the World Bank, a lending institution which was initially tasked with loaning funds for the rebuilding of destroyed infrastructure in Europe as well as the expansion of capabilities in developing countries. While the Bretton Woods system was agreed upon in and the IMF was founded in , the system truly became operational in At that point, the conversion of currency became tied to the U.
As Investopedia noted, the system was more permissive than a gold standard, but was predictable and not volatile. In the period leading up to , the IMF ensured the system was observed globally and possessed a pool of currency contributed by each member country around the world.
The IMF could then lend out money as nations required it. The fund was not a fully functional central bank, however, as it could not print money. Financial crises during the term of U.
President Richard Nixon led to the end of the Bretton Woods system.
0コメント