Weaknesses of Bretton woods Agreement

By | May 26, 2017

The Bretton Woods system of monetary system management created the rules for the commercial and financial relations among the world’s major developing nations. Until the early 1970s, the Bretton Woods system was effective in maintaining the standard or fixed exchange rates for the leading nations that had created it, especially the United Nations. Due to this fixed exchange rate, countries experienced balance of payments deficit. This leads to increase in the respective currency in the foreign exchange market. Hence, affects the exchange value of that currency. The Central banks had to act at this time and failure to which might create a financial crisis as it happened in the year 1956-58. French Franc crisis and problems of British pound were the examples. The currencies of the respective nations when they were devalued to correct the payment imbalances. Thus the delayed adjustment of the parties to change in the economic environment of the countries was the weakest point of Bretton Woods Agreement. This led to a lack of trust and strike at the foundation of guesswork.

Another considerable problem was that one national currency had to be an international reserve currency at that time. This made the national monetary and economic policy of the United States liberated from external fiscal pressures, while greatly influencing those foreign economies. To guarantee international liquidity; the USA has enforced o run shortage in their balance of payments, to avoid world inflation. However, in the 1960s they ran a policy that restricted the convertibility of the U.S. dollar to compete for the insufficient reserves to meet the currency supply and demand. But other member nations were not ready to accept the high inflation rates and the value of dollar ended up being weak. Hence, the system of Bretton Woods collapsed.