EECS 1530 Lecture Notes - Lecture 29: Bretton Woods System, Foreign Exchange Market, Pound Sterling
21 Jun 2018
School
Course
Professor
EECS 1530 Lecture 29 Notes
Introduction
Floating Exchange Rate System
When World War I began in 1914, the gold standard was suspended.
Some countries reverted to the gold standard in the 1920s but abandoned it as a result
of the U.S. and European banking panic during the Great Depression.
In the 1930s, some countries attempted to peg their currency to the dollar or the British
pound, but there were frequent revisions.
As a result of instability in the foreign exchange market and the severe restrictions on
international transactions during this period, the volume of international trade declined.
Agreements on Fixed Exchange Rates In 1944, an international agreement (known as the
Bretton Woods Agreement) called for fixed exchange rates between currencies.
Exchange rates were established between currencies, and governments intervened to
prevent exchange rates from moving more than 1 percent above or below their initially
established levels.
This agreement among countries lasted until 1971.
By 1971 the U.S. dollar had apparently become overvalued
The foreign demand for U.S. dollars was substantially less than the supply of dollars for
sale (to be exchanged for other currencies).
Representatives from the major nations met to discuss this dilemma.
As a result of this conference, which led to the Smithsonian Agreement, the U.S. dollar
was devalued relative to the other major currencies.
The degree to which the dollar was devalued varied with each foreign currency.
Not only was the dollar’s value reset, but exchange rates were also allowed to fluctuate
by 2.25 percent in either direction from the newly set rates.
These boundaries of 2.25 percent were wider than the previous boundaries (of 1
percent) and thus enabled exchange rates to move more freely.
Document Summary
When world war i began in 1914, the gold standard was suspended. Some countries reverted to the gold standard in the 1920s but abandoned it as a result of the u. s. and european banking panic during the great depression. Not only was the dollar"s value reset, but exchange rates were also allowed to fluctuate by 2. 25 percent in either direction from the newly set rates. These boundaries of 2. 25 percent were wider than the previous boundaries (of 1 percent) and thus enabled exchange rates to move more freely. Even with the wider bands allowed by the smithsonian agreement, governments still had difficulty maintaining exchange rates within the stated boundaries. Countries reverted to the gold standard in the 1920s but abandoned it as a result of the. U. s. and european banking panic during the great depression. In the 1930s, some countries attempted to peg their currency to the dollar or the british pound, but there were frequent revisions.
