Analyze and discuss the Bretton Woods Agreement and state what the agreement was for and why it was created. Include any difficulties they faced in getting society to agree with their proposal. Briefly describe the 'gold standard' evolution and collapse.
Response: World War II was over. Europe and Asia was in shambles, both in term of governance as well as from an economic standpoint. In order to resurrect Europe from the state that it was in, the Bretton Woods Conference took place in July 1, 1944. Apart from replacing the gold standard with the American dollar, the conference also two familiar organizations that exist until this day: the International Monetary Fund and the World Bank (Buttonwood, 2014).
A number of countries had found it difficult to maintain fixed exchange rates as they were struggling with trade deficits and as a result, had pushed their currencies lower in value (Milnes, 2013). Hence, this resulted in the creation of the International Monetary Fund which would serve as an international money lender just in case these members countries needed help if their currency values dipped too low. This seemed to be a much better option than to place trade barriers or increase interest rates. Most importantly, a number of these countries could make adjustments to their currencies just so that they could rebuild their countries after the war (Amadeo, 2017). Without a doubt, the United States remained the dominant force in the cooperation efforts since it had almost three-quarters of the world's gold in its possession at the time. By virtue of that, the results of the Bretton Wood Conference resulted in its member countries using the American dollar as the standard instead of gold – otherwise known as the reserve currency that lasts until this day. Apart from this, even if the dollar value against gold remained the same for a substantial period of time, its value increased against other currencies and would become the reason why the Bretton Wood system would collapse a few decades later. In other words, all other currencies were pegged to the American dollar while it was linked to gold. What this system also restricted was capital flows so as to prevent any kind of speculation against currency pegs (Buttonwood, 2014).
However, most countries after World War II were more than happy to abandon the gold standard and the Bretton Wood agreement strove just to do that. In fact, in letting go of the gold standard, they were now left with no standard and which is why the Agreement seemed like a suitable replacement for those countries who could not afford buying gold at an increased rate. In fact, there was more flexibility for these countries as they were allowed to fix a fundamental disequilibrium by changing their currency values accordingly (Amadeo, 2017). As for the International Monetary Fund, it was created not only to lend money to member countries that were struggling to keep their currency values from dropping too low but also the enforce the Bretton Woods Agreement as well. Having said that, the American dollar was now, for all practical purposes, the Gold Standard (Buttonwood, 2014).
Speaking of which, and because most countries wanted to do away with the gold standard, there was little or no opposition to using the American dollar as a global currency. Instead of gold, all member countries of the Bretton Wood Agreement decided to use American currency instead. In fact, there was no option for member countries to use gold in domestic convertibility but other currencies to adjust their balances. Most of all, their currencies had a fixed value against the dollar even if each of these countries were building gold reserves on their own. The era of the gold standard was all but over even if the dependence on this standard began to drop sharply much earlier to World War II. This was one significant reason why there was little or no opposition to using the American dollar instead of gold so as to maintain their balance of payments. In addition, the Great Depression and World War I also drove home the issues of a shortage of gold as well as exchange rate instabilities that could not help countries, in terms of short-term liquidity crises. This is where the Bretton Woods Agreement sought to change things completely by introducing an international money system that removed their member countries dependencies on gold (Braithwaite & Drahos, 2001).
Of course, this hegemony by the United States wasn't to last for very long and it was in 1973 that the Bretton Woods Agreement fell apart, leading to Nixon breaking off ties that linked the American dollar to gold (Amadeo, 2016). By that time, there was too many dollars in the world and not enough gold in the United States to back the currency if and when other countries decided to buy gold in exchange for American dollars (Stein, 2014). Since, by this time, the American dollar was accepted world wide, there was no need to back the American dollar and which was why it was abandoned completely leading to people just using fiat currency that has no intrinsic value. Still, this step was made possible since citizens of any country had to pay their taxes using the national currency, whether it was backed by gold or not. From an international standpoint, the American dollar was the de facto currency that the world used and which is why abandoning the gold standard arguably did not affect its dominance in world markets. With the collapse of Bretton Woods Agreement however, a number of countries began leaving the arrangement and were free to choose any form of exchange arrangement they would like except for pegging their currency to gold (“The of the Bretton”, n.d.). So, now with transactions only based on paper money, the abandonment of the gold standard, and which has lasted for centuries is now complete.
This is exactly the system that we follow today where paper currency, especially the American dollar, is not backed by gold. Experts believe that this has weakened the dollar while others are of the opinion that it has allowed for greater economic growth since there would never be as much gold as there is paper currency. Having said that, with the rise of nations such as Japan, Germany among others in the following years, the Bretton Woods Agreement (and the adoption of the 'gold standard') had truly run its course.
References
Amadeo, K. (2017). Bretton Woods Systems and 1944 Agreement. The Balance. Retrieved from https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133
Milnes, P. (2013). Guide: The Top 10 Things That Move The Currency Markets. Traders DNA Website. Retrieved from http://www.tradersdna.com/education/guide-the-top-10-things-that-move-the-currency-markets/
Buttonwood. (2014). What Was Decided At The Bretton Woods Summit. Economist. Retrieved from http://www.economist.com/blogs/economist-explains/2014/06/economist-explains-20
Braithwaite, J. & Drahos, P. (2001). Bretton Woods: Birth and Breakdown. Global Policy Forum. Retrieved from https://www.globalpolicy.org/component/content/article/209/42675.html
Stein, D. (2014). The End of the Gold Standard. David Stein Website. Retrieved from http://www.jdavidstein.com/gold-standard.html
Amadeo, K. (2016). The History of the Gold Standard. The Balance. Retrieved from https://www.thebalance.com/what-is-the-history-of-the-gold-standard-3306136
The End of the Bretton Woods System (1972-81). (n.d.). International Monetary Fund. Retrieved from https://www.imf.org/external/about/histend.htm
