An Evaluation of the Bretton Woods System on the Global Economy

This report provides an overview of the Bretton Woods System, which was established in 1944 to stabilize the global economy by pegging currencies to the US dollar, which was in turn pegged to gold. The report details the system's eventual collapse due to factors such as US inflation, the rise of currency convertibility, and the subsequent economic challenges. It then contrasts the fixed exchange rate system with the floating exchange rate system, highlighting the advantages of the latter in managing trade deficits and inflation, while acknowledging its potential drawbacks such as speculation and uncertainty. The report also references key academic sources to support its arguments.

Running head: GLOBAL ECONOMY
Global Economy
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Running head: GLOBAL ECONOMY
Table of Contents
Discussion..................................................................................................................................3
References..................................................................................................................................4

Running head: GLOBAL ECONOMY
Discussion
The Bretton Woods System was introduced in 1944 to stabilize and support a steady
growth of the world economy. The concept of the system was to base the US dollar on gold
standards, which was $35 per ounce of gold, since the US was the most dominating country
in the world. Thus, due to this, all the currency of the world was indirectly based on gold
standards because by exchange their own currency with the US dollar at a fixed exchange
rate any country can link their currency to gold. However, the Bretton Woods System was put
to an end in 1971 due to three reasons (Eckes Jr, 2012). Firstly, the US was using the system
to export its inflation to other countries since dollar is the base of the world economy.
Secondly, with the advent of currency convertibility system of European countries could be
converted to other currencies directly and thirdly, the conversion of the dollar to the gold
starting with France and other countries led to the economic difficulties during late 1960s.
Thus, addressing the difficulty of fixed exchange rate in solving the financial crisis, inflation
and managing trade deficits the US introduced floating exchange rate and thereby abolished
the Bretton Woods System (Towbin &Weber, 2013). Hence, it is clear that for advanced
economies, it was difficult to use the fixed exchange rate to counter the trade deficit and other
financial difficulties since fixed exchange rate cannot be changed frequently. On the other
hand, the floating exchange rate allows a country change its exchange rate to make up for the
trade deficit and inflation just by adjusting the external price of their currency making it a
better tool to deal with the present day economic difficulties. However, it comes with some
drawbacks such as speculation, lack of investment and uncertainty.

Running head: GLOBAL ECONOMY
References
Eckes Jr, A. E. (2012). A search for solvency: Bretton Woods and the international monetary
system, 1941-1971. University of Texas Press.
Towbin, P., & Weber, S. (2013). Limits of floating exchange rates: The role of foreign
currency debt and import structure. Journal of Development
Economics, 101, 179-194.