The Bretton Woods System Essay

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.

The closing days of the 1920’s were a start of what would be the worst economic disaster that had ever been witnessed. The effect that the Great Depression had on capitalist countries such as Germany and the United States, was that their stocks and shares heavy economy plunged, leaving businesses unable to trade, and poverty throughout the nation. In the case of France, the depression initially did not suddenly bring the economy down drastically as it had to the more industrialised nations. Although relatively unscathed at first, by 1931 the ripple effect had hit France which steamrolled the economic downturn of the French economy. With France following the gold standard, the economic downturn lasted much longer than other affected

This article is about the circumstances that led to the collapse of the economy in 1929. It relates to my research proposal because I am evaluating historic events that led to the financial crisis of 1929. The article discusses how deflation played an important role in expanding the depression, and how the Gold Standard, a monetary system in which a country’s government allows its currency unit to be freely converted into fixed amounts of gold and vice versa, was an extremely bad decision because it caused the dollar to lose its value. This source was informal because it discusses prehistoric events that led to the

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,

This depression lead many to say that gold was inadequate to use in a capitalist system. Many countries stayed with the gold system thinking they could patch up the gold standard, as it had worked perfectly before World War I and it was still the most advanced economic policy to date, so many countries stayed on the gold standard. What many countries didn’t expect, which would lead to the downfall of the gold standard, was World War II.

“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.

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.

As a result of the Vietnam war, the US did the most anticipated and foolish thing and just began printing much more money to finance the war. Coverage for “gold-for-dollar” debt was reasonable before the war. But, some countries in particular France saw in which places things were heading. Charles de Gaulle was adamant about having the French US Dollar inventory redeemed for gold, as was promised. This exchanges happened to also take place and caused the back-end of the gold coverage for the USD to downsize to around 20% from 50% far past the economic breaking point.

These effects were the stock market thrash of 1929 and the great economic depression of 1930 respectively (Macdonald, 2010). The GDP for the United States in 1929 was $ 1.057 trillion and $ 0.967 trillion in 1930. The change in GDP was – 8.5 percent. The prices of goods and services in the US market fell by 6.4 percent (Key economic indicators: The United States, 2015). Nevertheless, the GDP for the United States rose steadily from 1950 up to today. During 1950 the nominal GDP for the United States was $ 300.2 billion. By 2015, the GDP for the United States increased to $17,947 billion (Choi & Wang, 2014). In 2015, the effect of a high dollar hurt exports. For example, the prices for oil collapsed or decreased drastically.

They kept the dollar proportional to the amount of gold the United State's possessed in its treasury and in the banks. The shift from the gold standard allowed an excess of dollars to be printed, thus causing inflation. Inflation caused the value of the US dollar to diminish and led to an insecure value of the dollar. The insecurities of the US dollar led to the Stock Market Crash in 1929. In addition, American spending greatly contributed to the Stock Market Crash. In the 1920s, Americans developed spending habits related involving an increasing amount of debt. The factory development during WWI shifted to a development of consumer goods in the 1920s. Consumer goods thus encouraged the spending of the American dollar. Many Americans went into debt pursuing the many luxuries of the 1920s. The increased amount of debt brought the stock market to crash in 1929. The shift from the gold standard, inflation rates, and excess consumer spending provoked the Stock Market Crash of 1929.

One of the characteristics of gold standard defined by Temin is that the adjustment mechanism for a trade deficit country was deflation rather than devaluation, that is, a change in domestic prices instead of a change in the exchange rate. In the event of a balance-of-payment deficit, countries on the gold standard could not devalue their currencies or expand the money supply to stimulate domestic demand, because by doing so would push up good prices, encourage more gold exports, and weaken the currency. Instead, they could only tighten monetary conditions with the goal of reducing domestic prices and costs until international balance was restored. “Critical to this process was the effort to reduce wages, the largest element in costs.” That is to say, the gold standard system must be maintained at the expense of the welfare of ordinary people, which they must either experienced wages fall or unemployment. This mechanism worked well to facilitate trade and exchange before the First World War, the reason,

participants in this conference created three organizations to help regulate the international economy. The first is the International Monetary Fund (IMF) which was established with the idea of regulating monetary policy. One of the benchmarks of the IMF is the stabilization of exchange rates and the loaning of money to help stabilize countries with balance of payments deficits. The second organization established was the General Agreement on Tariffs and Trade (GATT) whose main focus was on a liberal trading order.

World War I also effected the economy of United States and the World economy. Stock market crashed in October 1929 in United States, and it marked the beginning of the great depression. Thousands of banks and businesses failed during this time. Agricultural production fell, and unemployment rose quickly. Unemployment commonly exceeded twenty five percent. In 1933 one out of every four American workers was out of a job. Since World War I effected the economies of almost all the countries, the world trade fell off and countries turned to nationalist economic policies that only provoked the problem. Prices of everything were so high that money sometimes was more useful to burn than to spend. Counties had over 280, 000 million dollars in expense during war. The costs of World War I was too big to pay for the world, and the economy of almost all the countries fell down.

Here the International Monetary Fund and the International Bank for Reconstruction and Development, later divided into the World Bank and Bank for International Settlement, were established. To regulate the international policy economy these institutions become known as the Bretton Woods institutions and became operational in 1946. The IMF, founded to stabilize countries' currencies in relation to each other, holds money in trust, which member countries can borrow according to terms set by the institution. The World Bank instead gives more long-term loans and sells bonds to corporations and governments, which bind the issuer to pay the bondholder the amount of the loan plus interest. However, the countries taking advantage of the opportunity to borrow money to improve their affected economy are obliged to launch a set of policies, known as the Washington Consensus, which was first presented in 1989. The reforms introduced by the Institute for International Economics include "deregulation, privatization, currency devaluation, social spending cuts, lower corporate taxes, export driven strategies, and removal of foreign investment restrictions" . More, "these loans are only granted when the countries agree to the adoption to a comprehensive programme of macro-economic stabilization and structural economic reform."