The Demise of the Bretton Wood System

1
The Demise of the Bretton Wood System the
Characteristics of the Post-Bretton Woods IPE

• Lecture 7

2
Reasons for the demise of the Bretton Woods System

• System work well for so long as the US economy
  remained strong, international confidence in it
  remained high and countries accepted and held
  dollars on the basis of them being as good as
  gold.
• Triffins Dilemma
• During 1960s and 1970s system began to collapse
• Decline in US balance of payments position
• Resulted in an over supply of dollars held by
  foreign banks and businesses
• Countries less willing to hold surplus dollars
  and increasingly redeemed their dollars for gold
• This resulted in a fall in gold reserves fell

3
The Nixon Shock

• August 1971 Richard Nixon announces that US would
  no longer exchange dollars for gold.
• Imposes surcharge imports into the US in an
  attempt to force a realignment of other
  currencies exchange rates
• Move unexpected and done without consultation
• Move heralds the beginning of a floating exchange
  rate system
• By 1976 all major currencies floating

4
Floating Exchange Rates

• Value of currencies are now determined by the
  market not govt intervention
• Initially assumed by international monetary
  managers that exchange rates among EDCs would
  fluctuate slowly and within narrow boundaries
• Floating exchange rates have brought about a
  potentially volatile IPE

5
Floating Exchange Rates

• Large fluctuations occur because govts have
  frequent difficulty managing international
  monetary exchange rates
• 1970s time of economic instability, US
  depreciates
• 2 X Oil crises
• 1973 OPEC 400 increase oil paid for in
  huge exodus of from the industrialized world,
  devaluation of throughout the 1970
• Investment of huge profits in the West by oil
  producers
• 1979 industrialized countries move to counter
  inflation by increasing interest rates
• Debt crisis

6
Floating Exchange Rates

• Early 1980s worst recession since 1930s
• Stagflation
• Before 2nd oil crisis relied on fiscal and
  monetary adjustment to stimulate recovery and
  avoid unemployment
• After 1979 move to control inflation through
  strict monetary policies
• Absence of US hegemonic leadership

7
Floating Exchange Rates

• 1985 emergence of the G5, G7 then the G8 1997
• (US, Britain, France, Japan and Germany) (
  Italy and Canada) (Russia)
• Currency speculation Enormous profits of
  trading in currency US 1.5 trillion worth of
  trade occurs daily

8
Floating Exchange Rates

• Efforts at monetary reform
• Implications for LDC
• 1980 Latin America
• 1997-1998 East Asia