The Collapse of Bretton Woods, Exchange-Rate Theories and European Monetary Integration

Abstract

On 15 August 1971 the international monetary arrangements that hadprevailed since the end of the Second World war ceased to function. Onthat day the golden anchor was cut loose from the system by theUnited States announcement that it was no longer prepared to buy andsell gold freely in transactions with foreign monetary authorities.President Nixon closed the ‘gold window’. This was the final deathblowto the tottering Bretton Woods system, for that system restedformally on the free convertibility of gold by at least one key-currencycountry, i.e. the United States. Severing the link between the dollar andgold at least temporarily converted the system into a combination of aninconvertible dollar standard and managed floating exchange rates.The old system suffered from serious weaknesses that became increasinglyevident from the 1960s onwards (e.g. the succession of currencycrises) and there was no shortage of plans, schemes, etc. for reformingthe system. In the event, the sudden collapse of the system aborteddiscussions on reform schemes and led instead to the second amendmentto Article IV of the IMF statutes on the exchange-rate regime(ratified and put into effect on April Fool’s Day 1978) which in effectlegalised the fait accompli of the managed float. In fact, the new ArticleIV legitimised practically any exchange-rate arrangement except a goldpeg and allowed countries to participate in cooperative arrangementswhich stabilise the exchange rates for a group of currencies relative toeach other, as in the European ‘snake’ - the forerunner of theEuropean Monetary System.