Blog Post #4

Artem Muchnik

11/11/13

                                                Blog post #4

            The Bretton Woods system emerged as the culmination of some two and a half years of planning for post-war monetary reconstruction, the system had some good approaches and at the same time there were multiple flaws in the system. In my opinion some approaches that I find were good in this system were that the system emerged with the “pegged rate” or “adjustable peg” currency regime, which was also known as the “par value system”, and the establishment of the International Monetary Fund (IMF). While some flaws in the system in my opinion are that the system utilized one currency, the currency it was pegged to, which could be detrimental to the system as if that currency failed, or inflated dramatically, other states dependant on it would suffer too due to it.

            I believe that the establishment of the pegged rate was a good approach because it gave other states the ability to maintain their currency in check as they also controlled some currency in the form of dollars; which did in fact make the US currency more desirable. The reason I find this was a good approach to the global economy is because it gave other states the ability to limit exchange rate fluctuations within maximum margins of 1%. The IMF was also a good approach in my opinion due to the fact that it let other states borrow needed foreign currency in amounts determined by the size of its quota in order to help maintain their own economy. Overall the IMF was largely established the way it was due to the fact that there was a need for an institutional forum for international cooperation on monetary matters.

            The flaws that were evident in this system were that since it was pegged to one specific currency, the US Dollar, there was a great chance that if the dollar were to fail the states dependant on it would too; and that ended up happening as the dollar inflated drastically. This lead not only to the economy of states dependant on the dollar to suffer but the system itself started to fall apart. This inflation that happened lead to the fact that the convertibility of the dollar into gold was suspended in 1971, as too many states were turning in their dollars for gold in hopes of redeeming their economy. This put the Bretton Woods system under much strain and eventually the Bretton Woods system passed into history.

            Overall I don’t think that it was a very smart idea to back global currencies with the US dollar as that just opens the door for multiple problems when multiple states depend upon the same currency, it doesn’t sound like the most logical approach unless it is sure that the pegged currency would never suffer any problems in value, which is bound to happen in my opinion. Since the Bretton Woods system pretty much completely depended upon the gold standard, I think that if it were kept, the system would have survived, but it is important for the system to be regulated properly with more rules and regulations. If the gold standard were still around it probably would have had a great impact on regulating the inflation rates, as every dollar would actually be backed by gold which actually holds its value and is more stable then currency in general.