The Bretton Woods system and gold standard are two significant mechanisms that aim to maintain economic stability and cooperation among nations. The Bretton Woods system was established at the end of the Second World War when America took steps towards dominating the world economic structure. This system centres on the USD for world trade. The gold standard was a prominent international phenomenon before the Second World War, directly linking world countries’ paper money or currency with gold. These systems are pillars for the development of a unifying global economy.
The main difference between Bretton Woods system and gold standard lies in their mechanisms for determining currency values and their flexibility in managing the money supply. Bretton Woods system pegs the currencies of world countries to the USD, which turns into pegs with the price of gold. In contrast, the gold standard directly ties a country’s currency to gold.
CONTENTS
1. Overview and Key Difference
2. What is the Bretton Woods System
3. What is Gold Standard
4. Similarities Between Bretton Woods System and Gold Standard
5. Bretton Woods System vs Gold Standard in Tabular Form
6. Summary – Bretton Woods System and Gold Standard
7. FAQ –Bretton Woods System and Gold Standard
What is the Bretton Woods System?
In 1944, representatives from 44 nations, approximately 730 delegates, gathered for the Bretton Woods Agreement. The primary goal was to establish a stable global exchange system, promoting economic stability worldwide. Two influential economists, John Maynard Keynes from Britain and Harry Dexter White, played pivotal roles in shaping the structure of the Bretton Woods system.
Keynes envisioned creating a new global-centric bank to coordinate world economies, proposing the introduction of a common currency called ‘bancor.’ However, White did not advocate replacing existing currencies. Instead, White aimed to maintain the dominance of the United States. Consequently, White suggested that the U.S. dollar be used as the intermediary for connecting world currencies. This proposal led to the adoption of the U.S. dollar as the linchpin for global economic relations within the Bretton Woods system.
What is the Gold Standard?
The gold standard was a mechanism in which the standard economic unit depended on a fixed quantity of net gold reserves. England pioneered the adoption of the gold standard in 1821, and subsequently, many developed countries embraced this interstate transaction system in the 1900s. This system directly linked a country’s currency with gold, aiming to eliminate economic barriers in trade. Until the First World War, the gold standard played a crucial role in maintaining global economic stability.
After the First World War, political instability among developed nations emerged, leading to the inability of the gold system to sustain economic stability. The system faced its greatest decline after the First World War and eventually disappeared entirely after the Second World War, with the replacement of the gold standard by the Bretton Woods system.
Similarities Between Bretton Woods System and Gold Standard
- Global powers controlled both the Bretton Woods system and the gold standard.
- Both systems are centered on the aim of enhancing world trade and maintaining economic stability.
- These two systems promote the sharing of wealth among nations and foster the concept of a global village.
Difference Between Bretton Woods System and Gold Standard
Definition
- Bretton Woods system is an international monetary system established after World War II, where currencies were pegged to the U.S. dollar, which was in turn tied to gold.
- Gold Standard is a monetary system where the value of a country’s currency is directly linked to a specific quantity of gold.
Mechanism
- In the gold standard system, a country’s currency is directly tied to gold, creating a rigid exchange rate system. The supply of money in a country is limited by the amount of gold held in its central reserve bank.
- On the other hand, the Bretton Woods system links the exchange value of a country’s currency to the U.S. dollar. This makes the Bretton Woods system more flexible, allowing central banks to adjust the money supply based on economic growth.
History
- The Bretton Woods system introduced the International Monetary Fund (IMF) to assist economically vulnerable countries. Before this agreement, countries relied on bilateral agreements to maintain trade.
- The gold standard, in contrast, was a more traditional way of fixing currency exchange rates.
Flexibility
- The gold standard had limitations in handling numerous transactions.
- The Bretton Woods system increased trade flow by offering more flexibility in managing currency values. The ability of central banks to adjust the money supply in the Bretton Woods system contributed to a more adaptable and responsive international monetary framework.
Below is a summary of the difference between Bretton Woods system and the gold standard in tabular form for side-by-side comparison.
Summary – Bretton Woods System vs Gold Standard
The Bretton Woods system and the gold standard, though both aimed at fostering global economic stability, diverged in their mechanisms. The gold standard’s rigid link to gold contrasted with the Bretton Woods system’s flexibility tied to the U.S. dollar. The transition marked a crucial shift, with the Bretton Woods system offering adaptability and the establishment of the International Monetary Fund (IMF) to address evolving post-World War II economic challenges. This historical shift underscores the dynamic nature of global monetary systems.
FAQ: Bretton Woods System and Gold Standard
1. Does the gold standard system prevail now?
- No, the gold standard system does not prevail now. After the instability caused by the First World War, the European economy faced challenges, leading to the failure of the gold standard system to maintain international trade. This system was discontinued by countries worldwide, with the United Kingdom being one of the first to abandon it in 1931.
2. What is meant by fiat money?
- Fiat money is a form of currency officially declared as legal tender by a government. It is not supported by any tangible asset like gold.
3. In the Bretton Woods Conference, why was the dollar chosen for the commodity exchange?
- During the Bretton Woods Conference, the choice of the U.S. dollar for the commodity exchange was influenced by the proposal of an American economist, White, who opposed the idea of a common currency proposed by British economist Keynes. The American economist justified that instead of introducing a new currency, it would be more practical to adopt an existing currency. The U.S. dollar was proposed and adopted for international transactions, leading to the establishment of the Bretton Woods system. This decision was partly driven by the significant investments made by the USA in the emerging world banking system at that time.
Reference:
1. “Bretton Woods system.” Wikipedia. Wikipedia Foundation.
2. “Gold standard.” Wikipedia. Wikipedia Foundation.
Image Courtesy:
1. “Price of gold” By Wikideas1 – Own work (CC0) via Commons Wikimedia