Question

Question 2: International Monetary System

a. Why did the world not go back to the Gold Standard at the end of World War 2?

b. Why did the world not adopt floating exchange rates at the end of World War 2?

c. What was the Bretton Woods Exchange Rate System abandoned by the major economies in March 1973?

Answer 1

The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold.

1. As World War II was coming to an end, the leading Western powers met to develop the Bretton Woods Agreement, which would be the framework for the global currency markets until 1971. Within the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which became the dominant reserve currency. The dollar, in turn, was convertible to gold at the fixed rate of $35 per ounce.

2. At the end of World War II, the conference at Bretton Woods, an effort to generate global economic stability and increase global trade, established the basic rules and regulations governing international exchange. As such, an international monetary system, embodied in the International Monetary Fund (IMF), was established to promote foreign trade and to maintain the monetary stability of countries and, therefore, that of the global economy. It was agreed that currencies would once again be fixed, or pegged, but this time to the U.S. dollar, which in turn was pegged to gold at $35 per ounce. This meant that the value of a currency was directly linked with the value of the U.S. dollar.

3. The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began to float against each other.