Edited by Thomas Eger and Hans-Bernd Schäfer
Chapter 16: Law and Economics of the Monetary Union
Helmut Siekmann 1 HISTORY From the end of World War II the international monetary system was based on the agreement signed at Bretton Woods on 22 July 1944, which basically encompassed a system of fixed exchange rates with an adjustment procedure and the obligation of the United States of America to redeem dollars into gold. It was combined with the establishment of the International Bank for Reconstruction and Development – the World Bank – and the International Monetary Fund (IMF) and ultimately became the legal basis for the supremacy of the U.S. dollar. The tensions within the system of fixed exchange rates grew rapidly throughout most of the 1960s partly because of domestic spending programs in the U.S. (“Great Society”) and the cost of the Vietnam War. The dollar was considered to be overvalued but the adjustment procedure could not function as the system depended crucially on the fixed convertibility rate between the dollar and gold. As a result the system dissolved between 1968 and 1973. The final turning point was the “temporary” suspension of the dollar’s convertibility into gold in August 1971, declared unilaterally by U.S. President Richard Nixon. All attempts to re-establish fixed exchange rates in the following months failed, so by March 1973 all major currencies floated against each other. Although the World Bank and the IMF had been created specifically to make the system of Bretton Woods function smoothly, especially to prevent and to mitigate current account imbalances, both institutions have survived until today. Their growing weight and...
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