How the International Monetary System operated

We know that foreign exchange dealers often intervene in foreign exchange markets. Recently, it is estimated that US$1,800 billion is traded every day on the foreign exchange market. But this was not always the case; this came about as a result of changes in the international monetary system.
Your answers to questions a) and b) should total approximately 300 to 350 words.
a) State how the International Monetary System operated as defined by Bretton Woods. (7 points)
b) Explain how the changes that occurred in the function of the monetary system and the capital markets led to the boom in the foreign exchange market.

 

 

 

The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. Thus, the name “Bretton Woods Agreement. Under the Bretton Woods System, gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar’s value. Approximately 730 delegates representing 44 countries met in Bretton Woods in July 1944 with the principal goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth. The Bretton Woods Agreement and System were central to these goals. The Bretton Woods Agreement also created two important organizations— the International Monetary Fund (IMF) and the World Bank. While the Bretton Woods System was dissolved in the 1970s, both the IMF and World Bank have remained strong pillars for the exchange of international currencies.The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. The Bretton Woods System collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank.

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