Discuss the problems associated with the Bretton Woods system.

Question

What will be an ideal response?

Answer 1

Under the Bretton Woods system, changes in exchange rates were permitted only as a last resort, which, in practice, came to mean that the country had a chronic deficit in the balance of payments of sizable proportions. Such nations were allowed to devalue their currencies relative to the dollar. Because devaluations came only after a long run of balance of payments deficits had depleted the country’s reserves, these devaluations often could be clearly foreseen and normally had to be large, thus inviting speculative onslaught.Deficit nations could be forced to devalue while surplus nations could resist upward revaluations. Because the value of the U.S. dollar was fixed in terms of gold, the United States was the one nation in the world that had no way to devalue its currency. The only way the dollar could fall was if the surplus nations would revalue their currencies upward. But they did not adjust frequently enough, so the United States developed an overvalued currency and chronic balance of payments deficits.