OPPapers.com

International Relations

What was the Bretton Woods system? Why did it breakdown?

In order to answer properly this question, it is important to establish first the main principles of this international monetary regime and its developments after 1945 and then to analyse the principal factors contributing on the breakdown and the end of this system.
In July 1944 as the World War 2 was still raging, Allies and other capitalist countries gathered in Bretton Woods to cast the foundations of a new international monetary system that would rein the Western financial world until mid of 1970s. The new system had two important elements: created a liberal international trading order and on the other side an international monetary regime. After the experience of the Great Depression and trauma caused to world economy and trade by the World War Two, the Bretton Wood system envisioned a new liberal trading order.
According to this system, Governments were free to pursue their national economic interests but in a fixed monetary order, based on fixed exchange rates, to prevent the undesirable effects of free competition that witnessed during the 1930s (Gilpin, 1987: 131). A main element of the Brent Woods system was the creation of the fixed exchange rates. This emerged on what was called "pegged rate" or "par value" currency regime. As a complete fixed currencies system was disliked by the British, claiming that this would constrain government policies during periods of crisis, floating exchange rates on the other side were discouraging for the Americans remembering the crisis of 1930s. Thus, the compromise was found with the ‘adjustable peg'. All currencies were made equal to the US dollar and the dollar fixed to gold (Cohen, 2002: 84). The par value then could be changed to the correct ‘fundamental disequilibrium'. Although being key to the operation of the par value system, disappointingly the ‘fundamental disequilibrium' "was never spelled out in any detail – a notorious omission that would...