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QUESTION 20 - End of the Bretton Woods system
Explain the strains inherent in the Bretton Woods monetary system and how it eventually was destroyed
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The Goal of the conference hosted at ​Bretton Woods,
New Hampshire wsas to create an efficient Foreign Exchange System​, preventing ​competitive devaluations of
currencies​, and ​promoting international economic growth​
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The designers of the system were,
J
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​Keynes​, British Economist, and H
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​White​, American Chief International Economist of the US Treasury
Department
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The BW system became a mix of both ideas
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The System became ​fully functional in 1958 with the dollar
pegged to the Gold​, and other currencies pegged to the US$
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To which extend did the strains inherent to the bretton Woods 1944 system lead to its end in the 1970s upon
Nixon’s decision?

The Triffin Trilemma of the BW system:
Triffin dilemma/paradox describes the economic interest conflicts arising between short term domestic and
long-term international objectives for countries, the currency of which serve as global reserve currencies
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This leads to a trade deficit​: an
outflow of domestic currency to foreign markets ​(negative Balance of Trade)​
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The
more demand of a currency, the higher the exchange rate​, the less competitive domestic exporting industries
become, causing a ​trade deficit​ for the currency issuing country, still keeping the world system balanced
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US pivot role in the BW system lead to its collapse:
US central role in the BW system as the key currency and key player of the BW system lead to many critics and
participated to the end of it
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This meant that the new world standard became the US dollar
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​The Triffin Trilemma depicts the following domestic issues for the US with its key position
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The President ​Nixon decided to deflate the dollar value to gold: to 1/38 of an ounce of gold and then ​1/42 of
an ounce
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Nixon decided to unhook the value of the dollar from the gold in 73 and without
price controls, the ​gold rose up to $120 per ounce in the ​free market​, leading to the end of the Bretton Woods
system
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​ This backfired, they suffered, the system ended
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With the fixed/pegged exchange rate regime, the
currencies are expected to bring stabilization for the trade of goods/services, and financing activities
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Minimization of the currency exchange rate volatility,
helping international trade relations, and support of loans from the WB
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​The Financial liberation (deregulation)​, lead to an incredible ​volatility (of the exchanges rates and
therefore the financial system), leading to a serie of bubbles and crashes
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The international monetary and
macro-economic coordination attempts to tackle with limited success the new volatility and imbalances
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The IMF campaigns
for free capital, but it is had to admit the crisis

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