Transcript Bretton Woods System - UNT College of Arts and Sciences

Bretton Woods System
Brief History
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Nations attempted to
revive gold standard
after World War I
Gold standard was
adopted by US in
1919 (1879)
Dropped it 1933
Returned to it in 1934
During that year, the
US raised the dollar
of gold from $20.67
to $35 ounce
Representatives of leading
nations in Bretton Woods,
New Hampshire 1944
Brief History (continued)
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By 1932, France and the United States Held
more than 70% of gold.
Other countries on gold standard engage in
domestic asset sale and raise interest rate.
Worldwide monetary contraction along with New
York stock market crash=deep global recession!
Reconstruction, development, and growth of
post-war economies become critical.
July 1944, representatives draft and sign the
Articles of Agreement of the International
Monetary Fund.
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Fixed exchange rates against the US dollar
and an unvarying dollar price of gold-$35
ounce.
It was a gold exchange standard, with the
dollar as its principal reserve currency.
Member countries could sell dollars to the
Federal Reserve for gold at the official price.
GOALS
Fix exchange rate to the dollar=>which was
tied into gold.
Eliminate uncertainties in international
transactions =>to promote the expansion of
international trade and investment.
What was the Bretton Wood
System?
Why did it fail?
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Government
spending
increased
(military
purchases and
other
government
spending)
No increases in
taxes.
Purchases
16
14
12
Purchases
10
8
6
4
2
0
64
65
66
67
68
69
70
71
72
Inflation rate (percent per year)
8
7
6
5
4
Inflation
3
2
1
0
64
65
66
67
68
69
70
71
72
Current account surplus ($billion)
8
6
4
2
Inflation
0
64
-2
-4
-6
65
66
67
68
69
70
71
72
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London gold market raises red flags.
Speculators began buying gold in anticipation
of a rise in dollar price.
Central banks announced the creation of the
two-tier system.
This was a TURNING POINT for the BWS,
since it made the official price of gold a
mythical device for central banks to square
accounts among each other.
US entered into a recession in 1970
Markets believed that to counter the
recession, the US had to devalue their
currency
Nixon reacts
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In 1971, he announces the US would no longer
automatically sell gold to foreign banks for
USD.
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A 10% tax on all imports to the US.
The Smithsonian Agreement
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Was drafted in December in 1971.
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The USD was devalued against foreign
currencies by about 8%.
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The 10% tax on imports set by Nixon was
removed.
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The “official” gold price was raised to
$38/ounce.
Aftermath
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February 1973, speculative attack on USD
forces FOREX to close.
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A further 10% depreciation of the USD
announced February 12.
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FOREX closes again!
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Floating of industrialized countries’ dollar EXRA
begins (suppose to be a “temporary” response).
Imbalances of U.S. Current Account
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Have the potential to cause instability in the global
economy.
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Current account balance deficits usually occur when
domestic private saving is relatively smaller than
investment or government deficits.
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In theory, countries with CA deficits should have their
currencies depreciate relative to the currencies of
countries that have CA surplus. This generally
increases exports and decreases imports. Sometimes
the currencies actually appreciate further increasing
the CA deficit.
History
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The US current account was relatively balanced until the
collapse of the Bretton Woods agreement.
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In the mid 1980s the current account deficit ballooned to
3% of GDP.
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The Plaza Accord between Germany, France, Japan, the
U.S. and U.K. attempted to fix the US current account
deficit by depreciation of the dollar relative to the Yen and
German Mark through coordinated policy changes
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The highest current account deficit was 6% of GDP in
2006
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Currently the CA deficit is hovering around 3-4% because
the recession has caused depreciation of the USD and Oil
prices are substantially lower.
Causes
Political
 Foreign central banks buy dollar assets to keep the
dollar relatively high against their currencies in
order to boost exports and create jobs.
 An example is China keeping their currency low
relative to the dollar to maximize exports since
Chinese imports will be relatively cheaper.
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Oil also aggravates the current account deficit as its
price increases.
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Relatively low interest rates during the last 10 years
has encouraged Americans consume more and save
less.
Causes(continued)
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Strong capital inflows from foreign countries have
generally kept the dollar from depreciating which would
balance the current account deficit.
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The US treasury bonds are consider a safe-haven in that
investors see treasury bonds as virtually riskless.
Even in recessions countries will flock to the dollar to
reduce risk this usually causes appreciation of the dollar
relative to foreign currencies.
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The savings rate in the US is relatively low.
So as long as foreigners are willing to supply investment
money, the current account deficit will remain.