How do you explain the rise and fall of the Bretton Woods system? and the creation of an optimal currency area?

Essay by kkqc9866University, Bachelor'sB-, February 2005

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How do you explain the rise and fall of the Bretton Woods system?

How far the emergence of the Euro can be seen against the background of the need for exchange rate stability and the creation of an optimal currency area?

1) The rise and fall of the Bretton Woods system:

The origins of the Bretton Woods system are to be found in the convergence of several key conditions: the shared experiences of the Great Depression, the concentration of power in a small number of states, and the presence of a dominant power willing and able to assume a leading role.

The depression of the 1930s, followed by the war, had vastly diminished commercial trade, the international exchange of currencies, and cross-border lending and borrowing. The creators of the Bretton Woods hoped to avoid a repeat of the disaster of the 1930s, when exchange controls undermined the international payments system that was the basis for world trade.

Some of the primary policies to increase competitiveness in 1930's were currency devaluations and protectionist measures. Reduction in the real value of a currencies made export products relatively cheaper, which in its turn in most cases reduced balance of payments deficits. However, currency devaluations also worsened national deflationary spirals, which resulted in plummeting national incomes, shrinking demand, mass unemployment, and a overall decline in the world trade. Whereas, trade protection policies only led to the greater alienation of the world community and the consequent retaliation measures by affected countries. Although these strategies tended to increase government revenues in the short-run, they dramatically undermined the dynamic efficiency of the medium and longer-term. Trade in the 1930s became largely restricted to currency blocs, such as British Empire. These blocs according to the opinion of many prominent economic thinkers reduced possibility for international flow...