The paper "The Bretton Woods Agreement" is a perfect example of a macro & microeconomics case study. After the end of the world war, the world economic powerhouses led by the US came together in Bretton New Hampshire to establish a new monetary system to replace the Gold standard system which had collapsed during the great depression of the 1930s. The driving idea behind revising the monetary system was the need to enable expansion in money supply through international trade and to revive the world economies that had been devastated by the war.
The United States accounted for more than half of the global economic output and had accumulated most of the world’ s gold. It was therefore logical for other world currencies to be tied to the dollar which was also to be pegged at $35 per ounce. This led to the creation of an adjustable pegged foreign exchange rate system (Triffin, 1957, Bordo, 1993). The new state of the monetary system meant that some readjustments have to be made. The major outcome of the Bretton woods agreement was the creation of the international monetary fund to monitor exchange rates for all the countries and lend reserve currencies to nations experiencing trade deficits due to an imbalance between exports and imports.
There was also the creation of the international bank for reconstruction and development now known as the World Bank. The bank was to provide the struggling and underdeveloped world nations with capital for reconstruction and development (Bordo, 1993, Eichengreen, 2008). The system worked quite well with Germany rising again from wartime destruction. With time though, the US economy had started to suffer negatively from the Bretton woods monetary system.
Inflation was very high in the US economy and the trade deficits had started to grow. The US could no longer allow the dollar to be trading on a fixed rate pegged to the dollar and so it had to abandon the system and allow its currency to freely float in the currency market. This marked the end of the Bretton woods system and assured in the floating system where countries let their currencies float freely against the dollar. The dollar started being used as a reserve currency for many world economies (Meltzer, 1991).
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