World Monetary Arrangements

Abstract

On 15 August 1971 the international monetary arrangements that prevailed since the end of the Second World War ceased to function. On that day the golden anchor was cut loose from the system by the United States announcement that it was no longer prepared to buy and sell gold freely in transactions with foreign monetary authorities. This was the final death blow to the tottering Bretton Woods system, for that system rested formally on the free convertibility of gold by at least one key-currency country, i.e. the United States. Severing the link between the dollar and gold at least temporarily converted the system into a combination of an inconvertible dollar standard and managed floating exchange rates. In effect the world now finds itself in a monetary interregnum pending new arrangements to replace the Bretton Woods system. The old system suffered from serious weaknesses that became increasingly evident from the 1960s onwards (e.g. the succession of currency crises) and there was no shortage of plans, schemes, etc., for reforming the system. In the event the sudden breakdown of the system, although expected for some time, presented the world’s financial authorities with the task of devising a new system on the basis of extant plans that hopefully would last another twenty-five years as the Bretton Woods system did.