Saturday, September 5, 2009

Abandonment of the Bretton Woods System

Continuing inflation and other economic weaknesses forced the abandonment of the Bretton System early in the 1970s. The first and most-important step in the dismantling of the old system was taken by the Nixon administration in August 1971, When the dollar was devalued and the convertibility of foreign official holdings of dollars into gold suspended. Gold ceased to be an international monetary medium;it is traded today only as a commodity.
A second step toward a new monetary system was taken in March 1973, when IMF member nations agreed to allow their currencies to float over a wider range, intervening only when currency-exchange rates varied from their par values by more than 2.25 percent.however,volatile economic conditions continued to generate massive speculative flows of capital across national boundaries. Using improved communications and funds-transfer techniques, speculators anticipating changes in official currency exchange rates could now move huge amounts of funds from one nation to another both cheaply and quickly. Central banks, including the Federal Reserve System, soon found themselves compelled to intervene in the currency markets almost daily and to use up huge amounts of foreign exchange reserves.soon, the largest IMF member countries were allowing their currencies to float in value, responding more actively to demand and supply forces in the marketplace.

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