Influence and Conclusion

The collapse of Bretton Woods System indicates the end of fixed exchange rate, most countries use float exchange rate until now. Although the system came to an end in 1971, its contribution to the world economy is till remembered. The system help western countries pulled through the most difficult period(after Second World War) and achieve economic resurgence (Marshall Plan). Moreover, the IMF and WB still exist and play an important role on the global economy, especially, in supporting the developing countries. Moreover, as Bordo and Eichengreen(1993) point out, the significance of the Bretton Woods System lies primarily in the inspiration it gave to the later development of formal regime theory.    

The collapse of Bretton Woods System

Let see a video first.:

In August 1971,  President Nixon announced that US government suspend the responsibility for other government using dollar to exchange for gold. This is called Nixon Shock. Actually, it was a great challenge to the Bretton Woods System, because dollar is not relate to the gold any more, it also means that dollar's dominate status lost. Besides, a series of negotiation among the  group  of ten countries took place, seeking to redesign the exchange rate in December 1971 at the Smithsonian institution in Washington D.C, which is call Smithsonian Agreement,agree adjust the fixed exchange rate. After this agreement, many countries decided to let their currency float. Until then, the Bretton Woods System, as the two incidents indicate, had completely collapsed.

So, what cause the collapse of Bretton Woods System? there are many reasons that can be found. Firstly, the weakness of mechanism, dollar as a unique global currency was used for international payment and international reserve in Bretton Woods System. Thus, on one part, it require the US kept favorable of balanced trade and sufficient gold reserve to ensure the value of dollar maintain. On the other part, other countries also need sufficient reserve, so they wanted US keep unfavorable of balanced trade. Thus, there was a contradiction on both sides. Moreover, the gold reserve of US government has reduced sharply during that period. From 1944 to 1971, there were seven times dollar crisis, most of they were caused by the war cost, such as Vietnam War. The government printed paper bill in great amount, but the gold reserve has decreased sharply. As we can see from the graph；

The gold reserve decrease almost 100 billion in 20 years. As a result, the USA could not meet their commitment . Finally, the inflation rate increased dramatically due to the low gold reserve.

As we can see the above graph, the inflation rate keep at a low level before 1965. at that period,which is so-called dollar shortage period. However, increasing sharply until 1971, which is what we called dollar glut period. The main reason why inflation rate change in such a dramatic way was because the government unlimited print dollar to pay for the war cost and dollar crisis. in 1971, the inflation rate even reached 11%, and that was the main reason why Nixon shock happened.

The development of Bretton Woods System

The plans of Bretton Woods System were developed by two important economist, the American minister of state in the U.S. treasury, Harry Dexter White and the British economist John Maynard Keynes. In fact, both of them have similar plan, in their plan, a bank of reconstruction (nowadays the World Bank) and an international stabilisation Fund (nowadays the IMF) should be established. The only difference was that Keynes tried to vest the IMF with possibilities to create money, which is calling Bancor, and with authority to take action on a much larger scale. Bancor as a new currency, can be used to buy goods and invest but  unable to exchange for gold and cash. the country of creditors can adjust the balance of payment imbalances, but cannot interpose the police of debtors's countries. In comparison, White's plan was more concerned about the gains of creditor's countries, since, as he suggested, other currency should has fixed exchange rate to dollar. 

Basically, Keynes' plan was more base on the British situation. It is well known that, British economy faced great economic recession after Second World War. Keynes tried to reduce the value of gold to rejuvenate British economy. While White' plan intended to keep the dominant status of the USA. some economists today agree that  Keynes was more farsighted than White.