The Collapse of the Bretton Woods System and its Replacement System

This essay analyzes the collapse of the Bretton Woods monetary system, which was based on the U.S. dollar and gold. The system ended when President Nixon stopped exchanging gold for dollars. The essay identifies key factors leading to the collapse, including the confidence problem, seigniorage issues, and adjustment problems related to balance of payments (BOP). The confidence problem arose as other countries doubted the U.S.'s ability to maintain the gold price. The seigniorage problem gave the U.S. an advantage as the dollar was the international reserve. The absence of an efficient BOP adjustment mechanism also contributed to the system's failure. The essay then discusses the efforts to replace the Bretton Woods system, such as the European Monetary System (EMS) and the creation of the Euro. It also mentions changes in international monetary relations like the use of Special Drawing Rights (SDRs) and IMF facilities like the Compensatory Financing Facility and the Extended Fund Facility.

What explains the collapse of
the post Bretton Woods
monetary system and what are
the key features of the system
that replaced it

TABLE OF CONTENTS
Evaluating the collapse of Post Bretton Woods monetary system..............................................3
REFERENCES................................................................................................................................5

Evaluating the collapse of Post Bretton Woods monetary system
The Bretton Woods System, gold was the base for the U.S dollar along with that other
currencies were pegged to the U.S dollar value. The system comes to an end when the President
Richard M. Nixon made an announcement that the U.S will no longer be exchanging the gold for
the U.S economy. The system worked fairly but also had some in-built weaknesses and
contradictions. The main factors that resulted into collapse are stated below.
Confidence problem
By 1950s, many European nations were having surplus in respect to the BOP while the
USA was running counterpart deficit. The continued economic expansion, it was crucial for the
US for maintaining the deficit as this is the way in which the growth of the international reserves
can be maintained in case of absence of other reserves which also involves gold (Bordo, 2020).
In the time frame when the US continued running deficit while making the gold reserves
constant and after just a matter of time the foreign holders involving the central bank started
doubting the ability of US in respect to maintaining the price of the gold at $35 per ounce and
thus, rushed for converting dollar to gold before $ is devalued. This event is called as the
confidence problem. Similar problem continued and it can also be argued that the having such
expectations leaded to nearly embarrassing accumulation of reserves.
Seigniorage Problem
It was also argued that Bretton Woods System has also resulted into giving rise to the
seigniorage of US in contrast to other nations as dollar was the international reserve and the
question of seigniorage arose as the US was the issuing country of dollar and thus central bank
could undertake high rate of return from the foreigners (Igwe, 2018). Thus, existence of
seigniorage which caused irritation among the countries which includes France.
Adjustment Problem
The major issue was the absence of efficient BOP adjustment mechanism as no nation
would be accepting persistent BOP deficit (Jin, Liu and Li, 2018). The Bretton Woods System
restricted the usage of the direct controls. It was argued that the system prescribed the +-1%
variation in the exchange rate. Thus, the critical issue was to identify whether the disequilibrium
is temporary or not.
After the collapse of the Bretton Woods various new efforts tried to replace the global
system. The efforts resulted into establishment of the European Monetary System (EMS)

resulted into the creation of the single currency called Euro. Along with that, there were
significant changes made in the international monetary relations which is being replaced by the
Special Drawing Rights in against the Gold reserve (Bordo, 2017). IMF also created facilities
like The Compensatory Financing Facility which allowed the member countries for drawing the
funds upto 100% in case of facing BOP difficulties, The Extended Fund Facility is another
benefit in which the member nations can draw upto 140% of their quota over the period of 3
years in situation of structural imbalances.

REFERENCES
Books and Journals
Bordo, M. D., 2017. The operation and demise of the Bretton Woods system; 1958 to 1971 (No.
w23189). National Bureau of Economic Research.
Bordo, M. D., 2020. The imbalances of the bretton woods system 1965 to 1973: US Inflation,
the Elephant in the Room. Open Economies Review. 31(1). pp.195-211.
Igwe, I. O., 2018. History of the international economy: The Bretton Woods system and its
impact on the economic development of developing countries. Athens Journal of
Law. 4(2). pp.105-126.
Jin, Y., Liu, D. and Li, Y., 2018. Factors that have led to the collapse of the Bretton Woods
system. American Journal of Industrial and Business Management. 8(10). pp.2133-
2142.