Bretton woods p4

Bretton woods
By the early 1960s, the U.S. dollar's fixed value against gold, under the Bretton Woods system of fixed
exchange rates, was seen as overvalued. A sizable increase in domestic spending on President Lyndon
Johnson's Great Society programs and a rise in military spending caused by the Vietnam War gradually
worsened the over valuation of the dollar.
End of Bretton Woods system
The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixon
announced the "temporary" suspension of the dollar's convertibility into gold. While the dollar had
struggled throughout most of the 1960s within the parity established at Bretton Woods, this crisis
marked the breakdown of the system. An attempt to revive the fixed exchange rates failed, and by
March 1973 the major currencies began to float against each other.
Since the collapse of the Bretton Woods system, IMF members have been free to choose any form of
exchange arrangement they wish (except pegging their currency to gold): allowing the currency to float
freely, pegging it to another currency or a basket of currencies, adopting the currency of another
country, participating in a currency bloc, or forming part of a monetary union.
Oil shocks
Many feared that the collapse of the Bretton Woods system would bring the period of rapid growth to
an end. In fact, the transition to floating exchange rates was relatively smooth, and it was certainly
timely: flexible exchange rates made it easier for economies to adjust to more expensive oil, when the
price suddenly started going up in October 1973. Floating rates have facilitated adjustments to external
shocks ever since.
The IMF responded to the challenges created by the oil price shocks of the 1970s by adapting its
lending instruments. To help oil importers deal with anticipated current account deficits and inflation in
the face of higher oil prices, it set up the first of two oil facilities.
Lets slip back a few years ....
1967 The US introduced the concept of the SDR (special drawing right) as an alternative to the dollar