It has been an expected fact that the balance of payments is self adjusting under fixed exchange rates, at least to the point when monetary authorities interfere with it by sterilizing the variations in the money supply that determines the adjustment mechanism. Irrespective of the omission of a global unit of account, base for neutral nations and means of settlement, the important disadvantage and the significant threat to prosperity in the global system rests in the wild gyrations of major exchange rates as well as the risk of instability position of the dollar. Ever since the initiation of the floating, the world economy presented a pronounced dollar cycle. Two digit inflation, low real interests rates as well as rising gold and oil prices followed the weak dollar of the late 1970s, high real interest rates, reducing inflation, enhancing deficits and reducing gold and oil prices represented by the strong dollar of the early 1980s and the initial part of the 1990s. (Thematic Issues International Money as a Public Good: The Case for a World Currency)
The historical evidences demonstrate that the appropriate amounts of monetary unions had a profound and strong positive impact with regard to international trade. Both the classical gold standard as well as the contemporary currency unions probably had affected trade by means of eradicating or reducing the payment frictions. The strong relationships which were being established in the above studies recommend about the necessity in order to examine the different periods using similar level of techniques. Bretton Woods was not a visualized to be a system of complete current account convertibility through its operation and the impositions on current account hindered the bilateral trade during its initial stages. The Bretton Woods system has been divided into two conceivable phases...
1946-58 and the convertible phase from 1959-70. The bilateral trade having no impositions was considered elementary to the design of the system. The effective currency unions prescribed by the Bretton Woods System have significantly decreased exchange rate volatility to a great extent and then it may have enhanced international trade. (The Post-War Rise of World Trade: Does the Bretton Woods System Deserve Credit?)
References
Benjamin. J. Cohen. Bretton Woods System. Retrieved at http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html. Accessed 12 June, 2006
Bordo, Michael. D; Bayoumi, Tamim. Getting pegged: comparing the 1879 and 1925 gold resumptions. March, 1996. Retrieved at http://www.nber.org/papers/W5497Accessed 12 June, 2006
Bretton Woods System. Wikipedia. Retrieved at http://en.wikipedia.org/wiki/Bretton_Woods_systemAccessed 12 June, 2006
Dooley, Michael. P. An Essay on the Revived Bretton Woods System. Retrieved at http://www.nber.org/papers/w9971Accessed 12 June, 2006
Mundell, R.A. A Reconsideration of the Twentieth Century. American Economic Review,
Vol. 90, No. 3. June 2000. pp. 327-340. Retrieved at http://links.jstor.org/sici?sici=0002-8282%28200006%2990%3A3%3C327%3AAROTTC%3E2.0.CO%3B2-8&size=LARGEAccessed 12 June, 2006
Mundell, Robert. Thematic Issues International Money as a Public Good: The Case for a World Currency. April, 2006. Retrieved at http://exchange.unido.org/upload/3361_WorldCurrency_MUNDELL.pdf. Accessed 12 June, 2006
Terborgh, Andrew. G. The Post-War Rise of World Trade: Does the Bretton Woods System
Deserve Credit? September, 2003. Retrieved at http://www.lse.ac.uk/collections/economicHistory/pdf/wp7803.pdf. Accessed 12 June, 2006
