Factors in Bretton Woods System Decline

2023-08-28
Summary:

The UN-established Bretton Woods system fell in the 1970s due to US inflation, eroded dollar trust, and rising trade deficits reducing demand.

The Bretton Woods system is an international monetary system established at the Bretton Woods Conference by the United Nations in 1944. The goal of this system is to promote international trade and financial stability through a fixed exchange rate and a fixed exchange rate between the US dollar and gold.


However, the Bretton Woods system collapsed in the 1970s, mainly due to the following reasons:

1. Overissuance and inflation of the US dollar

The core of the Bretton Woods system is the international monetary system based on the US dollar. However, in the late 1960s and early 1970s, the United States launched a war of aggression against Vietnam, resulting in a huge fiscal deficit and a large printing of US dollars, leading to an oversupply of US dollars and inflation. This has led to a decrease in confidence in the US dollar in other countries, fearing a depreciation of the US dollar, which in turn has led to the collapse of the Bretton Woods system.


2. The increase in the US trade deficit

Over time, the US trade deficit continues to expand, which means that US imports exceed exports. This has led to an imbalance in the US balance of payments, leading to a decrease in demand for the US dollar from other countries. Other countries began to worry that the United States could not maintain a fixed exchange rate between the US dollar and gold and began to transfer foreign exchange reserves to gold. However, in 1960, the US gold reserves decreased to $17.8 billion, marking the first crisis of the US dollar. In March 1968, the US gold reserves fell to $12.1 billion, triggering the second US dollar crisis. In 1973, the United States experienced the most severe economic crisis, lacking sufficient gold reserves as a foundation, seriously shaking the credibility of the US dollar.


3. Limitations of the International Gold Standard

The Bretton Woods system is based on the international gold standard, where the value of currency is linked to a certain amount of gold. However, over time, the supply of gold is insufficient to meet the demand of the global economy, which limits the sustainability of the international gold standard. In addition, the international gold standard cannot adapt to the constantly changing economic and financial environment, which is also one of the reasons for the collapse of the Bretton Woods system.


4. Changes in the international economy

In the 1970s, the global economy faced many challenges and changes, including the oil crisis, economic recession, and inflation.

The European currency market has started to develop rapidly, especially the currency swap market between European Monetary Union countries. This has led other countries around the world to seek diversification and opportunities to replace the US dollar in the European currency market, thereby reducing their dependence on the US dollar.

These changes made the Bretton Woods system unable to respond effectively, leading to the collapse of the international monetary system.

Bretton Woods: Rise and Fall
Core Contrasts Establishment of the Bretton Woods System Collapse of the Bretton Woods System
Establishment Date 1944 1970s
Objectives Promote international trade and financial stability Collapse of the international monetary system
Currency Basis US Dollar Decreased confidence in the US Dollar, reduced demand
Trade Imbalance Balanced trade Growing trade deficits
Gold Reserves Fixed exchange rates with gold Insufficient gold supply, limitations of the gold standard
Economic Environment Change Relatively stable Challenges and changes
Development of European Currency Markets - Opportunities to substitute the US Dollar

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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