Bretton Woods System
Bretton Woods Conference is the biggest turning point in the history of determining Exchange Rate. The Bretton woods conference was held in America in July 1944. Bretton woods conference formed two international organisations - International Monetary Fund (IMF) and World Bank. Both IMF and world bank are together called as Bretton Woods twins. IMF is established in 1945 to promote international financial co-operation. It starts its operation on March 1, 1947. It's headquarters is at Washington. World Bank is established on December 27, 1945 to help reconstruction and development of member countries. It starts its operation on June 25, 1946. It's headquarters is also at Washington.
Bretton Woods Conference becomes the reason for carry out the fixed exchange rate system again. This system begin two tier convertibility arrangement in currency change. The Bretton woods Agreement established a system through which a fixed currency exchange rate could be created using gold as the universal standard. But the short term liability of american dollar increased. As a result, bretton woods system failed to return 35 dollar for one ounce of gold. Then the central banks of member countries decided to change their reserve dollar to gold. As a result, system failed to keep the word. Among the critics of Bretton wood system, Robert Triffin pointed out the condition like this. So this condition is known in the name of Triffin Dilemman. The opinion of Triffin is that IMF should be changed to deposit bank of alternate central banks. He also said that under the control of IMF, a reserve asset should be started. Following this, the radical change in the working of IMF happened.
A new currency called Special Drawing Rights instead of Gold is implemented. It was in 1967, the new reserve currency called SDR is formed instead of gold. SDR is also known as Paper Gold. SDR is not an original currency. It is an accounting unit used for international money transactions. Earlier the value of SDR is determined according to the value of gold. But later it is dropped. Currently the value of SDR is calculated based on the total value of dollar, euro, pound and yen (four currencies). All countries agreed to accept SDR as Research Currency. During the end of 1960s, Bretton Woods system collapsed (abandoned in 1971) and following this, Floating Exchange Rate System becomes active. Advanced countries adopted Managed Floating Exchange Rate System. In 1999, the major countries of European Union accepted to receive a general currency. As a result, Euro Currency came into existence.
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