Why bretton woods system failed

The fluctuation range of European currencies was widened to 2. That decision led European officials to see the need to narrow the margins between European currencies. The collapse of the Bretton Woods System In , the Bretton Woods Agreements introduced a gold standard system that transformed the US dollar into an international reserve currency, the only one convertible to gold. Back to top Explore our resources.

They include the Asian Financial Crisis, the tech bubble, the U. The Fed views these shocks as isolated developments that can be contained by regulatory policies. But I maintain that asset bubbles have become more prevalent because central banks allow credit to be readily available at low interest rates when inflation is tame. The problem has become even more acute since the GFC, as central banks undertook large-scale purchases of government debt and mortgage-backed securities.

The Fed has been unable to wean itself off unorthodox monetary policies for the past 13 years. My view is that the Fed may tolerate higher inflation in the near term. But it is unlikely to make the same mistake as in the s when inflation spiraled out of control. Nicholas Sargen, Ph. View the discussion thread. Skip to main content. A must-read political newsletter that breaks news and catches you up on what is happening. Most Popular - Easy to read, daily digest of the news from The Hill and around the world.

The Hill's must read political newsletter that breaks news and catches you up on what happened in the morning and what to look for after lunch. Delivered to your inbox every weekday evening, our politics and policy newsletters are a daily digest of today's news and what's expected to break tomorrow. National Security. Agency Insider. This implies that it is not the management of exchange rate system but structural flaws that led to the failure of Bretton Woods system.

Considering the structural flaws of the Bretton Woods system discussed above, fixed exchange rate should be changed into floating exchange rate. In recent years, Asian markets have been thriving and created a rising demand that led to appreciation of their currency. However, the currency in Asia would fail to experience appreciation if the currency in Asia were pegged a fixed exchange rate to the dollars and other currency. Conversely, a floating exchange rate would create a better international balance.

However, some regulations of the exchange rate system is still needed. The Jamaica Monetary system, which was created after the breakdown of the Bretton Woods system and centered on floating exchange rate, has experienced strong turbulence owing to the rapid change of exchange rate. Second, a successfully designed agreement is also needed to sustain a system. In the case of Bretton Woods as discussed above, the flawed design of Bretton Woods agreement precipitated the uncooperative behavior of its member countries.

Therefore, to prevent these detrimental defaults, a restraint mechanism should necessarily be set. First of all, countries should be given the incentive to cooperative even not under optimal conditions. In other words, although countries during the Bretton Woods system would be better off break the agreement and devalue their currency, they would still choose to cooperate because they would be promised to be compensating for their loss.

In this way, countries are secured against potential loss of compliance, and may cooperate more effectively. Under this circumstance, every country would weigh the cost and benefits more cautiously before making decisions to default in the agreement. This article researches the causes of the collapse of the Bretton Woods system. It comes to the conclusion that structural flaws are the main causes of the breakdown, and puts forward some brief lessons that are useful to ensure a more stable international monetary system.

Therefore, a lesson naturally comes up: a well-designed structure of the system is needed in order to successfully implement it. This article analyses a number of viewpoints of the cause of the breakdown of the Bretton Woods system from various papers and presents a conclusion based on the evaluation of the validity of these views according to the historical context.

This article focuses mainly on qualitative measures and may not include adequate models or graphs. It only explains and evaluates different factors that have led to the breakdown of the Bretton Woods system without plotting them in different graphs to verify the effect.

Therefore, further quantitative researches could be done. Further research could focus on mathematical simulations of the effect of different factors on the exchange rates, which clearly shows the significance of each factor. We would like to express our sincere appreciation to Dr.

David C. Shimko of NYU for his valuable suggestions and guidelines for this research program. We would also like to thank CIS for offering us an opportunity to engage in scientific research training. The Undergraduates Award Library. National Bureau of Economic Research, No. Center on International Cooperation. Home Journals Article. DOI: Abstract The Bretton Woods system was abandoned by the U.

Share and Cite:. Jin, Y. American Journal of Industrial and Business Management , 8 , Introduction 1. Background The international dominance of pound sterling was weakened during WWI, leading to the restoration of gold standard. There Are Two Institutions in the Bretton Woods System 1 IMF, short for International Monetary Fund, provides short-term financial loans for countries in serious economic crisis, in order to maintain balance of international payment and safeguard the stability of the international monetary system.

Our Objectives and Methods Many previous work have been done to research the cause of the breakdown of the Bretton Woods system. Conflicts of Interest The authors declare no conflicts of interest. References [ 1 ] Milovsky, N. Journals Menu. Contact us. All Rights Reserved.