Mechanism Behind The Foundation Of Bretton Woods System

The Gold Standard was the framework by which the value of cash was characterized in terms of gold, for which the money could be traded. The Gold Standard ended up being deserted in the Depression of the 1930s. Friedman felt that,“The gold standard is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States” ( “The Gold Standard:Please Stop”).Economists who contradict the Gold Standard may perceive what must be accomplished with a specific end goal to make a centrally controlled paper standard better than a decentralized Gold Standard. Milton Friedman poses the key question: "How can we establish a monetary system that is stable, free from irresponsible tinkering, and

To discuss its historic background I will concentrate on the Bretton Woods System. Bretton Woods System is an international currency system started form 1944 July at the end of the Second World War. This system require each country to obey the rule that they tied its currency to gold in order to keep the exchange rate stable and prevent the currencies from devaluation. The establishment of this system ensure the resume and development of capitalist world economy especially America. Although this system ultimately disintegrated in 1973, it still make significant contributions to America’s irreplaceable role today.

2) Interest rate parity (how exchange rate is determined by the flows of capital) and

With the onset of the war, the stability of the relationship between Britain, France, and Germany – which the Gold Standard was dependent on – crippled (lecture, 10/13). During the interwar period, 1914-1945, the lack of coordination between economies led to a liquidity shortage while the nations held a floating exchange rate. The interwar period saw a breakdown in international monetary coordination – proving that a floating economy was doomed for failure (FLB 264). Outside of the lack of international coordination, the Gold Standard had other downfalls leading to its demise. For example, national governments had no authority to stimulate their country’s economies in times of need. Moreover, the fixed economy limits foreign trade, hurting the country’s industries (lecture,

After World War II, the Bretton Woods Agreement established the gold standard and two support institutions called the International Monetary Fund (IMF) and the World Bank. This would lead to a shift, away from the gold standard, to more relaxed systems. The idea of currency purely backed by gold was slowly being shifted to a trust based currency. These institutions purpose was to regulate the economies by injecting or taking money in a process called sterilization. Sterilization is to protect certain countries from a going bankrupt. If a country goes bankrupt, it chain a chain reaction of bankruptcies. So, in order to maintain balance, currencies need to be stable enough, so that it can be in debt without having to declare bankruptcy. The idea is

Ever since the Bretton Woods agreement in 1944, the U.S dollar became the world’s currency. Bretton Woods agreement was basically an agreement on which every country currency would be back up by the dollar, due to the fact that after WWII United States was the only one with the biggest gold reserve in the world. Although it was proposed as a good idea it had its flaws for one even though it help the U.S and other countries there was simply not enough gold to continue backing up the dollar value. Which lead to President Richard Nixon to abolish the gold standard economy. His abolish of a gold standard economy lead to a new proposal on which the dollar would be back by.

More workers and growing war industry caused the U.S. to eventually take the economic lead over the world. According to Michael French, “the wartime expansion of the US industrial base, coupled with devastation in Europe and Japan placed the US economy in an extraordinarily powerful position. US industrial production was 45 per cent of world output in 1948 and its national income and productivity, especially in manufacturing, far outstripped other economies” (French, 197). Michael French also mentioned in his book, US Economic History Since 1945, establishing International Money Fund in 1944. IMF, along with Marshall Plan from years 1948-1951, placed US dollar as a reserve currency for other nations around the world. Yet, all of this would not have happened if the World War II have not erupted. Orson Welles, an American director and producer said about the industrial and technological progress during wartime, “in Italy for thirty years under the Borgias they had warfare, terror, murder, bloodshed--they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love, five hundred years of democracy and peace, and what did they produce? The cuckoo clock!” (Nasar, 404). Many people are opposing this point of view and pointing out that war can never be consider as a good period of time. Yet, Orson Welles is right because America would have much worse time without the World War II,

After World War One, as America became a major world power, New York City emerged as a global financial centre. Prior to the first war, London was known as the financial capital of the world. The United States’ production of food and other valuable items, allowed it to become a major economic power. While many other European nations suffered after WWI, the United States began investing money into foreign nations, and exporting many goods into other countries. The former economic powers, France, Britain, and Germany were left in an economic crisis with millions of dollars in debt, which the United States used to become a global economic power. During this period of time, New York City was the financial powerhouse of the United States. Global currencies were exchanged, and money was invested in this city, thus allowing it to become not only the financial capital of the U.S, but a global financial capital.

“A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation.” – Ross Perot. The words of the 1992 Presidential candidate still ring true today, and in fact they have since the abolition of the gold standard in 1971 by President Nixon. Ever since that warm August day the United States has been on a death plunge into immaculate amounts of debt. However, by the establishment of the silver standard in the way I will explain to you today, makes it clear that action on such a policy must be taken.

The development of the European economy since 1945 to the present day has been significant as much change has occurred during this period of time. The first and possibly most interesting development that occurred during this time that I will write about is ‘The Golden age’. The Golden age transpired post World War II in the time period 1950-1973 and was a period of great economic growth within Europe. There were several reasons for the growth and development of the European economy during this time period and I will discuss each in detail throughout my essay with the support of scholarly articles and book chapters relevant to the development of the European economy throughout these

Prior to the institution of the Federal Reserve Act, the U.S. financial system’s basic structure was determined by the National Banking Acts of 1863, 1864, and 1865 (Broz, 1999). The purpose of the legislation was to provide a uniform national currency and to raise revenue for the federal government during wartime (Broz, 1999). While effective in its main purposes, it was flawed in the fact that the increase of available currency had little to no effect on consumer demand which led to large seasonal swings in interest rates and banking panics (Friedman & Schwartz, 168-169). In an attempt to rectify the shortcomings of the National Banking System, government turned to the New York Clearinghouse Association, purportedly known as the first central bank. Originally responsible for the settlement of payments between financial institutions, it was chosen because it was the only source at the time that had the ability to provide funds during high demand periods through a discount window or an open market operation (Broz, 1999). In the end, it failed to maintain an adequate amount of liquid reserves to counteract the monetary crisis‘s that ensued during the agricultural harvest cycles, when currency demands accelerated.

Nixon raised the price of gold during his presidency. This angered nations all who had signed the Bretton Woods Agreement (see Definition page) after World War II. As the world’s reserve currency, the US dollar had an additional problem. As global trade grew, so too did the demand for U.S. dollar reserves. For a time, the demand for US dollars was satisfied by an increasing

At the end of World War Two, the Bretton Woods system was established for world currencies. This system involved countries fixing their currencies to the US Dollar, which in turn was tied to the value of gold at a fixed exchange rate of $35 per ounce. As this was a fixed exchange rate system it effectively forced countries to pursue a certain monetary policy, in order to keep their currency pegged to the Dollar and in turn the value of gold.

Eight decades has elapsed since the outbreak of the Great Depression, but the continuing mystery of its cause keep provoking academic debates among scholars from various fields. Eichengreen and Temin joint the debates by linking the gold-standard ideology with the cause of the Great Depression. They content that because of this ideology monetary and fiscal authorities implemented deflationary policies when the hindsight shows clearly that expansionary policies were needed. And these contractionary policies consequently pushed the stumbling world economy into the Great Depression. Eichengreen and Temin put heavy weight on analyzing why the prewar gold standard could be a force for international financial stability while interwar gold

1. The gold standard and the money supply. Under the gold standard all national governments promised to follow the “rules of the game”. This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply? A country’s money supply was limited to the amount of gold held by its central bank or treasury. For example, if a country had 1,000,000 ounces of gold and its fixed rate of exchange was 100 local currency units per ounce of gold, that country could have 100,000,000 local currency units outstanding. Any change in its holdings of