Explain BRETTON WOODS SYSTEM of exchange rate , in detail.?

Question

Answer

Bretton Woods system. The Bretton Woods system was the first system used to control the value of money between different countries. It meant that each country had to have a monetary policy that kept the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold.

Answer

Breeton wood system is a system of rules, regulations and procedures for the major economies of the World to ensure there economic stability.

Answer

Bretton Woods System of Exchange Rate

The Bretton Woods system of exchange rate was a monetary regime that was established in 1944 during the Bretton Woods Conference held in New Hampshire, United States. It aimed to create a stable international monetary system that would facilitate international trade and economic growth. The system was in place until 1971 when it collapsed due to various economic and political factors.

Background and Objectives

The Bretton Woods system was established in the aftermath of World War II, with the primary objective of preventing the economic instability that occurred during the interwar period. The system aimed to achieve the following:

1. Fixed Exchange Rates: The system established fixed exchange rates between currencies, which were determined based on the value of the U.S. dollar. The U.S. dollar was pegged to gold at a fixed rate of $35 per ounce.

2. Stable International Monetary System: The system aimed to promote stability in international monetary relations by preventing competitive devaluations and currency wars.

3. International Cooperation: It aimed to foster international cooperation and coordination among nations to promote economic growth and development.

Main Components of the Bretton Woods System

1. International Monetary Fund (IMF): The IMF was established as a key institution under the Bretton Woods system. Its main objective was to provide financial assistance and stability to member countries facing balance of payments problems.

2. Fixed Exchange Rates: Under the Bretton Woods system, countries agreed to maintain their exchange rates within a narrow band of fluctuation against the U.S. dollar. Central banks were responsible for maintaining the exchange rates by buying or selling their currencies in foreign exchange markets.

3. Gold Convertibility: The U.S. dollar was the only currency directly convertible to gold at a fixed rate. Other currencies were indirectly convertible to gold through the U.S. dollar.

4. Capital Controls: To maintain stability, countries were allowed to impose capital controls to restrict the flow of capital across borders.

Reasons for the Collapse

The Bretton Woods system eventually collapsed in 1971 due to several factors:

1. Inflation: The U.S. experienced high inflation rates in the 1960s, which led to doubts about the value of the U.S. dollar and the sustainability of the fixed exchange rate system.

2. Speculative Attacks: Speculators began to question the ability of the U.S. to maintain the gold convertibility of the U.S. dollar. This led to massive capital outflows and speculative attacks against the U.S. dollar.

3. Trade Imbalances: The system faced difficulties in adjusting to trade imbalances, as countries with surpluses (such as Germany and Japan) accumulated large amounts of U.S. dollars, putting pressure on the U.S. gold reserves.

4. Political Factors: The system faced political challenges, including the Vietnam War and the increasing influence of European economies, which demanded greater control over their monetary policies.

In conclusion, the Bretton Woods system of exchange rate was a significant international monetary system aimed at promoting stability and economic growth. It established fixed exchange rates, created the IMF, and allowed for gold convertibility. However,

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