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As this assignment’s purpose is to provide a comprehensive perspective on the changes to the global financial system brought about by the introduction of the Bretton Woods exchange rates framework, it is necessary to dwell on the specific effects and changes to status quo resulting from the Bretton Woods system. This section will deal with this subject focusing on the fluctuations in the leading currencies’ exchange rates after Bretton Woods, while situating these changes within the greater geo-economic perspective.
The 1930s economic debacle was widely believed to be caused by the excessive fluctuations in the leading global currencies that disabled the proper functioning of the world trade system and led to the growing protectionism and trade wars (Eichengreen & Irwin, 1995). The emergence of currency blocs, i.e. the British Commonwealth ‘Sterling Bloc’, the Central European Reichsmark bloc, etc., brought about the combination of the steady exchange rate within each of these blocs with the rampant fluctuations of inter-block exchange rates. Consequently, the world trade flows in this period were characterized by intense instability.
Thus, it would be understandable that one of the primary objectives of the establishment of the Bretton Woods fixed exchange rates system was to ensure that the inter-war era-style currency wars and chaotic exchange rates fluctuations would never occur again. To this end, the general fixation of the convertible global currencies to the U.S. dollar was carried out, with the latter’s exchange rate being basically tied to the U.S. gold reserves. While this measure undoubtedly led to greater exchange rate stability, it was predicated upon the assumption of the U.S. mastery of its gold reserve; hence, the system would unravel if the U.S. dollars’ exchange rate can no longer be guaranteed by its gold.
Eventually, the economic maladies caused by the war in Vietnam, as well as the growing awareness of economic imbalances between the USA and the new economic powers of West Germany and Japan, forced the global financial markets to reflect this disparity by the skyrocketing price of gold in 1970-1971. These developments led U.S. President Richard Nixon to announce the effective termination of the U.S. dollar-to-gold convertibility, as well as the Bretton Woods exchange rate system itself. The flexible exchange rates were once again the dominant feature of international financial system.
Hence, the history of the Bretton Woods fixed exchange rates system demonstrated that the prolonged maintenance of the currency status quo based upon the single currency’s gold convertibility would be scarcely possible within the context of the rapid shifts of the global economy’s balance of powers. While the USA might be a winner at the early stages of the Bretton Woods system’s existence, it was gradually losing its gold reserves’ dominance to the benefit of West Germany and Japan after the mid 1950s, culminating in the 1971 ‘Nixon Shock’. Therefore, the history of the Bretton Woods system exposes the inherent limitations of any attempts at forging the ‘eternal’ international financial order into existence.