Bretton Woods System – a gold exchange standard

This was an attempt at another gold standard — a gold-exchange standard to be precise. The dollar was at the center and could be exchanged for gold. There were three major flaws that ultimately led to the failure of Bretton Woods:

First and foremost was the fact that dollar-based credit flooded into the global economy as the U.S. ran a persistent balance of payments deficit. This credit was issued in a big way to fund the Vietnam War and the Great Society social programs.

Second, countries consistently fiddled with the original dollar parities to gain an advantage on trade. In fact, the European country parities were set quite low in order to help them rebuild after WWII. The Marshall Plan also forced dollar credit into Europe so they could buy U.S. goods. However, these parities were never revised upward as was originally agreed upon.

And third, the pegged system required capital controls and could not be sustained as the free flow of capital across national borders increased during this period, which is China’s problem today. Pegged rates are artificial and cause speculation. And cross border flows become destabilizing in this environment, where as such flows were stabilizing under the classic gold standard.

This is why China’s pegged rate regime is untenable and leading to massive capital misallocation inside the country. It is a one-way bet by speculators who are driving hot money, which adds to China’s woes when it comes to controlling credit growth given its dangerous inflationary environment.

The above article is written in part by author, Jack Crooks who writes for Money and

Anthony DiChi,
Your friend in Forex Currency Trading, FX Information and Forex News at TradeCurrencyNow