How did the Bretton Woods system operate? What caused its collapse? Some think the current system of managed but floating rates is too unstable. What would generate the instability?
The simple explanation how the Bretton Woods system operated is the leading free-market economies agree to fix their exchange rates to the US dollar, which was based on a fixed exchange rate between the US dollar and gold. So, anyone could exchange dollars for gold at a fixed rate. This gave much needed stability to Europe and Japan to recover from the 2nd world war.
The collapse came when the first Arab embargo caused the price of oil (priced in US dollars) to jump and thus causing inflation in the US in 1971. Because of the fear of inflation, many around the world wanted to exchange their dollars for gold. The US gold reserves could not keep up and President Nixon ended the ...
The solution discusses how the world currency system has changed from Bretton Woods to the current system. In addition, issues surrounding the stability and the instability of the world's currency exchange rate system and the pros and cons are mentioned.