After close to three decades of running the international financial system, Bretton Woods finally went the way of history due to growing structural imbalances among the economies, leading to mounting volatility and speculation in a one-year period from June 1972 to June 1973. At the time the United Kingdom, facing deficit problems, initially floated the Sterling. Then it was devaluated further in February of 1973, losing 11 percent of its value along with the Swiss Franc and the Japanese Yen. This eventually led to the European Economic Community floating their currencies as well.
At the core of Bretton Woods’ problems were deteriorating confidence in the dollar’s ability to maintain full convertibility and the unwillingness of surplus countries to revalue for its adverse impact in external trade. Despite a lastditch effort by the Group of Ten finance ministers through the Smithsonian Agreement in December 1971, the international financial system from 1973 onward saw market-driven floating exchange rates taking hold. Several times efforts for reestablishing controlled systems were undertaken with varying levels of success. The most well known of these was Europe’s Exchange Rate Mechanism of the 1990s, which eventually led to the European Monetary Union.
International Monetary Market
In December 1972, the International Monetary Market (IMM) was incorporated as a division of the Chicago Mercantile Exchange (CME) that specialized in currency futures, interest-rate futures, and stock index futures, as well as futures options.
Into the Millennium
Until the arrival of the Euro in 2002 (see next subsection), the international scene has remained essentially unchanged for more than 30 years, although the volume of transactions in foreign exchange has increased enormously. Electronic trading has made it possible to initiate instantaneous trades in the billions of dollars. That has introduced the fragile nature of technology with its lack of redundancy, but no fallout from that has yet to be seen. China’s emergence as a world power has focused attention on its economy and its currency, the yuan, which at the present time is controlled and does not float. The author believes it will be impossible to continue the tight control over the yuan, and floating rates will be inevitable.
At the core of Bretton Woods’ problems were deteriorating confidence in the dollar’s ability to maintain full convertibility and the unwillingness of surplus countries to revalue for its adverse impact in external trade. Despite a lastditch effort by the Group of Ten finance ministers through the Smithsonian Agreement in December 1971, the international financial system from 1973 onward saw market-driven floating exchange rates taking hold. Several times efforts for reestablishing controlled systems were undertaken with varying levels of success. The most well known of these was Europe’s Exchange Rate Mechanism of the 1990s, which eventually led to the European Monetary Union.
International Monetary Market
In December 1972, the International Monetary Market (IMM) was incorporated as a division of the Chicago Mercantile Exchange (CME) that specialized in currency futures, interest-rate futures, and stock index futures, as well as futures options.
Into the Millennium
Until the arrival of the Euro in 2002 (see next subsection), the international scene has remained essentially unchanged for more than 30 years, although the volume of transactions in foreign exchange has increased enormously. Electronic trading has made it possible to initiate instantaneous trades in the billions of dollars. That has introduced the fragile nature of technology with its lack of redundancy, but no fallout from that has yet to be seen. China’s emergence as a world power has focused attention on its economy and its currency, the yuan, which at the present time is controlled and does not float. The author believes it will be impossible to continue the tight control over the yuan, and floating rates will be inevitable.
