The paper "Bretton Woods Agreement" is a wonderful example of an assignment on macro and microeconomics. The monetary system has grown through several changes and phases. To understand the Bretton Woods System, it would be helpful to understand the history behind the same and the causes for its decline to a floating rate system in the present scenario. An international exchange rate has been always eyed upon right from the Classical Gold Standard. The Gold Standard came into existence in the year 1870 where most countries of the world adopted the Gold Standard.
The currency of every country was backed by the gold reserves in the country which gave the paper currency value in real terms. Anyone holding a paper currency of the country could exchange the same for a par value of gold from the governmental gold reserves and vice-versa (Swamy and Tavlas, 2005). Thus, during the Gold Standard, a currency was equally backed by the gold reserves that a country possessed. Thus, the Gold Standard provided long-run price stability in the economy and was so designed that it would automatically adhere to shocks in the economy and maintained equilibrium.
However, the Gold Standard during World War-1 and The Great Depression started showing signs of dismay and loopholes mainly on account of the following reasons (Meltzer, 1991). Since during the Gold Standard, a currency was equally backed by the gold reserves of the country, each country has limited gold reserves which could not keep in pace with the international and national trade growth rate. Powerful countries like Great Britain panicked during The Great Depression which was followed by other countries of the world.
There was a huge requirement of the fund during World War-1 and for social programs and welfare which was not readily available as a new currency could only be inflicted in the economy with an equal back of gold reserves for the same, which was not possible during the World War-1 Scenario. Further during The Great Depression, Federal Reserve kept inflating its interest rates to make the dollar a more powerful currency and save its gold reserves which further worsened the economic scenario and the world was hit by greater Recession (Obstfeld, 1993).
Finally, in 1914, Gold Standard was abolished by most of the countries of the world for a time being.
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