What Is The Demise Of The Breton Woods System?

For the first three decades after World War 2, under the Breton Woods arrangements, the U.S dollar was the key currency. Most international trade and finance were carried out in dollars, and payments were most often made in dollars. Exchange rate parities were quoted in dollar terms, and private and government reserves were kept invested in dollar securities.

This was a period of unprecedented growth and prosperity. The industrial nations began tom lower trade barriers and to make all their currencies freely convertible. The economies of Western Europe and East Asia recovered from war damage and grew t spectacular rates. During this period, the world was on a dollar standard. In essence, the U.S dollar was the world currency because of its stability, convertibility and widespread acceptability.

But recovery contained the seeds of its own destruction. U.S trade deficits were fueled by an overvalued currency, budget deficits to finance the Vietnam War, and growing overseas investment by American firms. Dollars consequently began to pile up abroad as Germany and Japan developed trade surpluses. Dollars holding abroad grew from next to nothing in 1945 to $50 billion in the early 1970s.