6.7: World Finance - Bretton Woods and Today

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International business involves money from more than one country. How to manage the exchange of these different currencies? Under the 1944 Bretton Woods system set up by the U.S. and its allies, exchange rates between major currencies were fixed, the currencies were backed by gold and the U.S. dollar was the global reserve currency. This was not sustainable as other countries rose, increased exports to the U.S. and held more dollars, so in 1971 Nixon cut the dollar from gold, let it float and imposed a 10% tariff.

Today, exchange rates constantly rise and fall in a $5 trillion/day money trading market; currencies are backed by the credit of the issuing governments; and the dollar, Euro and Yen are all held as reserve currencies. (Check your wallet - the currency is Federal Reserve Notes, i.e., backed by the U.S. Federal Reserve Bank.) In the Bretton Woods era, the national banks could usually control exchange rates. However, today trading volume is so huge that the central banks can influence but cannot control the flood of currency trading. For instance, Japan and China buy dollars to keep the price high and keep their currencies’ prices low, in order to make their exports cheaper.