PART II - AFTER BRETTON WOODS

Summary

After almost three decades of relative exchange-rate stability, the collapse of the Bretton Woods system in the early 1970s created a situation that resembled in many ways the monetary chaos after World War I. Exchange rates were fluctuating wildly, currency crises and devaluations were frequent events, and the fight against inflation became a top priority for governments and central banks. However, despite all resemblances, the differences between the period after the end of Bretton Woods and the interwar years were more fundamental. First, some countries, notably the United States and Japan, made a permanent shift to flexible-exchange-rate regimes during the 1970s. Exchange-rate policies were not determined by the expectation that the old system would be restored. Second, the fixed-exchange-rate arrangements created by the members of the European Community (EC), namely, the Snake and the European Monetary System (EMS), were much less rigid than the interwar gold standard. The pegs were fixed but adjustable, capital mobility was limited until the late 1980s, and it was possible to leave the arrangement temporarily or to change the conditions of membership. It wasn't until introduction of the euro at the end of the century that many European countries again gave up their monetary policy independence. From 1973 to 1999, the options were much more numerous than during the interwar years.