Question

The Bretton Woods system was an effort to solve the international trade problems that emerged during the Great Depression. Explain.

Answer 1

The 1944 Bretton Woods accord created a new global monetary system. It replaced the gold standard as the global currency, with the U.S. dollar. Thus, it established America as the dominant power in the global economy. After the agreement was signed, America was the only country with the ability to print dollars.

Members of the Bretton Woods system agreed to avoid trade wars. To increase trade, for example, they would not lower their currencies strictly. But under certain circumstances, they could be manipulating their currencies. For example, if foreign direct investment started destabilizing their economies they could take action. They also could adjust their currency values to reconstruct after a war

Most countries were on gold standard until World War I. They cut the links to gold, however, so they could print the money they had to pay for the cost of the battle. That caused hyperinflation, as demand was overwhelmed by the money supply. Countries returned to gold standard safety after the war. All went well until the Great Depression. The investors switched to forex trading and commodities after the stock market crash of 1929. It drove up the gold price, leading to people being redeeming their dollars for gold. The Federal Reserve made matters worse by raising interest rates by defending the nation's gold reserve.

The Bretton Woods system provided more flexibility for nations than strict adherence to the gold standard. It also provided less volatility than a non standard currency system. A member country also retained the ability to change the value of its currency, if necessary, in its current account balance to fix a "fundamental disequilibrium."