By the early 1960s, the fixed value of the US dollar against gold, under the Bretton Woods system of fixed exchange rates, was perceived as overvalued. The massive increase in domestic spending on President Lyndon Johnson's Great Society programs and the surge in military spending caused by the Vietnam war exacerbated the overvaluation of the dollar.
Creation of the Bretton Woods System of Fixed exchange rate
July 1944
A new international monetary system was formed in July 1944 by delegates from forty-four countries in Bretton Woods, New Hampshire.
The delegates of the conference approved the creation of the International Monetary Fund and the World Bank Group.Thus came the name "Bretton Woods Agreement" The Bretton Woods exchange rate system lasted until 1971.
What Was the Bretton Woods Agreement and System Explained ?
Under the Bretton Woods system, Gold was the basis of the US Dollar, and other currencies were tied to the value of the US Dollar.
The Bretton Woods system effectively ended in the early 1970s, when President Richard Nixon announced that the United States would not exchange gold for American currency.
Some 730 delegates from 44 countries met in Bretton Woods in July 1944 to establish an efficient trading system, avoid competitive devaluation and promote international economic growth. The Bretton Woods Agreement and the Bretton Woods System have played a central role in achieving these goals.
The Bretton Woods Agreement also created two important organizations: the International Monetary Fund and the World Bank. Despite the collapse of the Bretton Woods system in 1970, the IMF and the World Bank remained strong pillars of international monetary trade.
Although the Bretton Woods Conference itself lasted only three weeks, the preparation took several years. The main developers of the Bretton Woods system were the famous British economist John Maynard Keynes and the American international chief economist of the US Treasury Harry Dexter White.
Keynes hoped to create a powerful world central bank called the Clearing Union and introduce a new international reserve currency called the Bank. The white plan provided for a smaller credit fund and a greater role for the United States.
Dollar instead of creating a new currency. In the end, the accepted Plan was based on the ideas of both and was more vulnerable to the White Plan.
It was only in 1958 that the Bretton Woods system began to fully function. After its implementation, its provisions required that the US Dollar be tied to the value of gold.
In addition, all other currencies in the system were tied to the value of the US Dollar. The exchange rate applied at the time set the price of gold at 35 per ounce.
The Bretton Woods System’s Collapse
In 1971, fearing that the supply of gold in the United States was no longer enough to cover the number of dollars in circulation, President Richard Nixon devalued the US dollar against Gold.
After the withdrawal from the gold reserve, a temporary suspension of the conversion of the dollar into gold was announced. By 1973, the Bretton Woods system had collapsed.
CONCLUTION
The Bretton Woods system remained in force until the persistent deficit in the US balance of payments led to the foreign-owned dollar exceeding the stock of American gold, which meant that the United States could not fulfill its obligation to redeem the dollar for gold at the official rate.
In 1971, President Richard Nixon ended the convertibility of the dollar into gold .
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