Is Bretton Woods system appropriate to deal with the crisis?

Today, Bretton woods system has become a new issue regarding to G20 concourse in Spain this November. The forum dwelled on how to recuperate economic disease caused by illiquidity in financial sector not only in United States but also in the rest of the world.



Today, Bretton woods system has become new issue regarding G20 concourse in Spain this November. The forum dwelled on how to recuperate economic disease caused by illiquidity in financial sector not only in United States but also in the rest countries in all regions. Bretton Woods II turn out to be an option due to its success in stabilizing the economies following the end of World War II, which cause harsh damage to all countries including European countries and Asian countries.

The Bretton Woods system established a regulation and assisting international financial institution’s nativity such as International Monetary Funds and International Bank for Reconstruction and Development – which later become World Bank. The system obliged the ratified members to maintain its currency in fix values in terms of gold price. In addition, since the principal “Based currency” would be the US Dollar, this meant that all of the other currencies will pegged to US dollar. And the convertibility would be fixed with maximum 1% of parity.

The problem is how to sustain faith on the dollar? It was an agreement that US dollar should link to gold at the rate of $35 per ounce of gold. If other countries or international financial institution is willing to change their dollar to gold, they can exchange on this rate. US dollar was picked as the only currency pegged on Gold price by reason of its strong purchasing power compare with the others even though British’s pound sterling.

As I mentioned before, the system has remarkable success in order to recuperate the economies from its disease. It can be seen from a descent of inflation rate and unemployment rate and also a raise in economic growth. Even though its successive completion, the system caused striking problem. Arbitrage between US dollar and Gold is the main problem that US government should deal with. Furthermore, President Nixon has decided not to peg the currency in term if Gold price anymore in 1971 because it has slaughtered US economy. Since then, Bretton Woods system was ended by US.

Divine to the failure of Bretton Woods system, it raise questions. Is it possible to put into practice the system to annihilate the crisis? Who wants to become a reference country? Can the reference country prevent its currency from an arbitrage action? Is it possible for the country to prevent its currency against speculators? Of course, It’s not an easy answer for the decision maker to make. A Black Monday in British becomes a suitable example to demonstrate that an economy is a fragile system vis-à-vis to speculators. No one can oppose capitalism by their self.