Which Of The Following Was A Factor In The Collapse Of The Bretton Woods Agreement

Member countries could only change their nominal value by more than 10 percent with IMF approval, based on the IMF`s conclusion that its balance of payments was in a “fundamental imbalance.” The formal definition of fundamental imbalance has never been established, resulting in uncertainties in permits and repeatedly attempting to devalue by less than 10%. [26] Any country that changed without authorization or after its refusal was denied access to the IMF. The system was a compromise between the fixed exchange rates of the gold standard, considered conducive to the reconstruction of the global trade and financial network, and the greater flexibility that countries had used in the 1930s to restore and maintain domestic economic and financial stability. The articles represented a compromise between Harry Dexter White`s American plan and John Maynard Keynes` British plan. The compromise created a customizable peg system based on the U.S. dollar, which can be converted into gold at $35 an ounce, as well as capital controls. The compromise gave members both exchange rate stability and the independence of their monetary authorities to maintain full employment. The IMF, which is based on the principle of a credit union where members could withdraw more than their initial gold quotas, was created to address temporary current account deficits. Moreover, from the point of view of the operationalists, Han believes that the reluctance of member countries to change the exchange rate has led to the immobility of capital, which anticipates the collapse of the Bretton Woods system. However, this argument can also be undermined by two structural shortcomings.

On the one hand, an important term of “fundamental imbalance” in the agreement was “not precisely defined” (Obstfeld, 1991) [6]. On the other hand, the anchoring system was defective. As other countries have had to pe pe pey their currencies to the USD, capital mobility has been restricted. On a larger scale, however, the agreement united 44 countries from around the world and brought them together to resolve a growing global financial crisis. It has helped strengthen the global economy as a whole and maximized the profits of international trade. Figure 4 shows the evolution of the exchange rate from euro to USD (1 euro to USD) from 1953 to 1971, including the last period of the Bretton Woods system, when problems arose, and the three United States dollar crisis. As the chart shows, during the first dollar crisis in 1960, the exchange rate fell rapidly, from about 0.99 to about 0.95. It continued to decline during the second dollar crisis in 1968 and the third in 1971, which occurred just before the collapse of the Bretton Woods system. Powerful nations agreed that the failure to coordinate exchange rates in the interwar period had exacerbated political tensions. This facilitated the decisions of the Bretton Woods Conference.

In addition, all The Governments participating in Bretton Woods agreed that the monetary chaos of the interwar period had brought several valuable lessons. The architects of Bretton Woods had developed a system in which exchange rate stability was a primary objective. But in an era of more activist economic policy, governments have not seriously considered fixed interest rates along the model of the classic 19th world gold standard. Century. Gold production was not even sufficient to meet the growing demands of growing international trade and investment. In addition, a considerable portion of the world`s known gold reserves were located in the Soviet Union, which would later develop as a Cold War rival with the United States and Western Europe. The operationalists invoke another mismanagement by arguing that other countries have not respected the exchange rate adjustment provided for in the article of the agreement. In the agreement, there was a term called “fundamental imbalance,” meaning that countries had the right to adjust their exchange rates within the 1% range if foreign and foreign payments were not balanced.


This entry was posted on Saturday, October 16th, 2021 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

Comments are closed.