What are the reasons for failure of Bretton Woods System?


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REASONS FOR THE FAILURE OF BRETTON WOODS SYSTEM:
1. As in the case of Gold Standard, this system also did not provide for any revision in
the price of gold. Due to inflation, it became uneconomical to produce gold. This led
to the suspension of gold production in various countries leading to stagnation of gold
reserves which had an adverse impact on international liquidity.
2. The system did not provide for any revaluation of parities due to which surplus
countries such as West Germany and Japan continued to enjoy export
competitiveness against the US economy. This aggravated the US trade deficit.
3. The system did not provide for a revision in the price of gold in terms of USD. Due to
this, it was not possible to devalue the US Dollar despite continued trade deficit. The
devaluation of the dollar would have adversely affected all countries having USD
reserves.
4. The continued trade deficit of the US created an over-supply of USD in the
international financial markets which reduced the acceptability of the USD. When the
Gold Convertibility Clause was invoked, the US authorities could not honour their
commitment to redeem USD against gold. This failure on the part of the US led to the
collapse of the system in 1971.


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MT UVA- University, Vocational and Affiliated Education for BMS

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