The Breton Woods agreement led to the global monetary system in use today. Probl

Question

The Breton Woods agreement led to the global monetary system in use today. Problems with Breton Woods, however, also led to its collapse and highlight a basic tension over the roles money plays in any economy. Review why Breton Woods first enabled the international exchange of goods and later created increasing financial instability. What did President Nixon do in 1971 that transformed the international monetary system? Explain how the modern global monetary system works. What does it mean when currencies “float” or are “pegged”? Give examples. Also provide an example and explanation for a case where the international monetary system contributed to political instability/unrest within a country.

Explanation / Answer

The purpose of the Bretton Woods meeting was to set up a new system of rules, regulations, and procedures for the major economies of the world to ensure their economic stability. To do this, Bretton Woods established The International Monetary Fund (IMF) and the World Bank. In 1944 Bretton Woods Conference, which created the International Monetary Fund and the International Bank for Reconstruction and Development, was a major landmark in international cooperation. However, the Bretton Woods system came under increasing pressure in the 1960s due to the lack of a reliable adjustment mechanism to manage payment imbalances as well as the persistent asymmetries in the balance-of-payments pressures faced by surplus and deficit countries. In 1971 the system effectively collapsed when the US government suspended convertibility of dollars into gold for other central banks—a decision that would prove to be permanent. The system that evolved to replace it can be viewed as a ‘non-system’ with diverse ad hoc arrangements. Viewed overall this non-system has proved to be fairly resilient, but some of its major gaps continue to have negative effects on the global economy.

Nixon’s package of proposals included:

Money creation in a debt-based monetary system. ... In this case no new money is created but money just changes hands. b) Money is "created" by central banks (like the Federal Reserve Bank in America or the ECB in Europe). If a government issues a government bond the central bank can "buy" this bond.

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